Fed halts interest rate cuts after 11 reductions in a row

Policy-makers give strong indicator that economy is on mend

January 31, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

Sending a strong signal that the nation's ailing economy is on the mend, Fed- eral Reserve policy-makers agreed yesterday to stand firm on interest rates after 11 consecutive cuts last year.

The move was widely viewed as evidence that the Fed believes that the economy, which has been in recession since March, is growing stronger.

One economist went so far as to declare the recession dead.

"To me, the recession ended last quarter and the recovery is under way," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

The Fed's stand-pat position was bolstered yesterday by a report showing that the economy actually grew in the fourth quarter. The gross domestic product - the total output of goods and services - rose at an annual rate of 0.2 percent, according to the Commerce Department.

Although the figure may be revised downward in coming weeks, many economists expected a 1 percent decline in GDP that would be comparable to the 1.3 percent drop in the third quarter.

"Based upon what most forecasters were looking for, you would have to say [the GDP showed] surprising strength," said Stephen Stanley, a senior market economist at Greenwich Capital Markets Inc., which is based in Greenwich, Conn. "It may be a little premature to say that we are out of the recession at this point. I think we are pretty much on the cusp; I think we are a month or two of being out of recession."

There have been several of signs indicating that the economy is on the rebound:

The Consumer Confidence Index rose for the second consecutive month to 97.3 in January.

Orders of durable goods - cars, machinery, airplanes, household appliances and other products that last three or more years - grew a surprising 2 percent in December.

Sales of new single-family homes climbed to a record 900,000 last year.

Federal Reserve Board Chairman Alan Greenspan had flagged earlier that the economy was improving. Last week, he told the Senate Budget Committee that the "forces" that have been restraining the economy are "starting to diminish and that activity is beginning to firm."

Yesterday's move by the policy-making Federal Open Market Committee left the federal funds rate - the rate banks charge each other on overnight borrowings - at 1.75 percent, its lowest level in 40 years.

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Fed said in a statement. "With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable ... the outlook for economic recovery has become more promising."

But the Fed warned that the "degree of any strength in business capital and household spending, however, is still uncertain," and that the "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

The stock market climbed on the news, with the closely watched Dow Jones industrial average rising 144.62 points, or 1.50 percent, to 9,762.86. The Standard & Poor's 500-stock index, a broader measure of the market, rose 12.93 points, or 1.17 percent, to 1,113.57. The Nasdaq composite index, which is made up of many large technology companies, rose 20.45 points, or 1.08 percent, to 1,913.44.

The Fed's decision marked the end of a string of 11 interest rate cuts - eight of them half percentage point reductions - that began Jan 3, 2001.

The cuts began two months before the country slipped into recession in March, as employment began falling along with industrial production and manufacturing sales. The Sept. 11 terrorist attacks also rocked the economy, crippling the airline industry and shutting down the stock market for four days.

The recession, declared in November by the National Bureau of Economic Research, snapped an unprecedented 10-year expansion that witnessed the stock market boom.

The Fed's decision yesterday to leave interest rates untouched came as no surprise to economists. Still, they remain divided on when the recession will end.

David Wyss, chief economist at Standard & Poor's in New York, said the recession will drag on until March. The economy "is still heading down, it is still getting close to the bottom," he said. "We are still seeing continued layoffs. Corporate earnings are weak and likely to remain there for the first half of the year."

Mark Vitner, senior economist at Wachovia Corp. in Charlotte, N.C., said the economy is in the late stages of a recession.

"The economy seems to be on the mend," he said. "I don't know if we are technically out of recession just yet, but the worst of the recession clearly seems to be behind us."

The recovery will be slow - one that people will barely notice, Vitner predicted.

"I don't think the economic recovery is gong to be all that strong," he said. "For most people, the economic recovery is going to be just as bad as the recession."

Sohn, the Wells Fargo economist, believes that the recession ended weeks ago. It was done in by strong consumer spending and rapid liquidations of inventories by corporations. He expects the Fed to begin raising interest rates in the second half of the year.

But Sohn agrees that the recovery will not be robust. Companies will continue to lay off workers and businesses won't start spending for months to come.

"The first half will not exactly be a barn burner," he said.

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