Washington, March 19 (Bloomberg) -- Federal Reserve policy makers will be watchingeconomic statistics, not stocks, when they decide how much to cut borrowing coststomorrow. That's why investors aren't likely to get the three-quarter-percentage-pointreduction they want in the Fed's benchmark interest rate. Investors began clamoring for such a rate cut after the Dow Jones Industrial Averagefell 7.7 percent last week, its worst weekly drop since October 1989. The NasdaqComposite Index, down 23 percent for the year, has dropped for seven straight weeks. At the same time, economic reports show U.S. consumer confidence is no longerfalling, steel production is rising, auto sales aren't as weak as had been feared, andhome construction and sales just won't quit. Growth is ``decently positive, and the Fed is focused on the real economy,'' said DavidJones, chief economist at Aubrey Lanston & Co in New York. ``The last thing a centralbanker wants is to be perceived as someone bailing out the stock market.'' After two interest-rate cuts from the Fed in January that totaled a full percentage point,some parts of the economy such as manufacturing continue to struggle. Industrialproduction fell for a fifth straight month in February, the longest string of declines sincethe 1990-91 recession. That's why economists and investors are counting on Fed Chairman Alan Greenspanand his colleagues, at their policy meeting tomorrow, to cut the target rate onovernight loans between banks at least a half point from the current 5.5 percent.
Fed Sees Growth Pickup
In recent public comments, Fed officials said they see growth picking up later thisyear. ``There are clearly some signs that might suggest strengthening and some signsthat suggest the risks are still to the downside,'' Fed Vice Chairman Roger Fergusonsaid last week in Rome. ``We've got to be fairly cautious about calling anythingprematurely here.'' Although consumer confidence was lower in January than at any time in more thanfour years, a measure of optimism from the University of Michigan was revised higherat the end of February from a preliminary estimate in mid-month. The mid-Marchconsumer sentiment result was even higher. Home resales rose 3.8 percent in January and home construction starts last monthwere on a pace close to that of all of last year, the third best since 1987. U.S. rawsteel production has been rising since January, when it slumped to a decade low.Weekly steel production is now higher than any time since mid- October.
Vehicle Sales
Vehicle sales in February were stronger than expected and put 2001 on pace to bethe third-best year on record, surpassing forecasts made at the start of the year. Theannual new car sales rate of 17.5 million for the month was higher than January andshowed that lower consumer confidence and falling stocks weren't leading consumersto put off car buying. If policy makers do cut by three-quarters of a point tomorrow, the overnight rate will fallto 4.75 percent. It will then be back where it was on June 29, 1999 -- the day beforethe Fed began a series of six rate increases to prevent the economy from overheating.In less than three months, the Fed would have wiped out actions that took 11 monthsto put in place. The rate increases of a year ago had their desired effect - - and then some. Theeconomy cooled to a 1.1 percent growth rate in the final three months of last year,after expanding at an average 6.1 percent pace in the 12 months from July 1999through June 2000. Greenspan told Congress last month the abruptness of theslowdown is why Fed policy makers ``quickened the pace'' of interest-rate cuts inJanuary.
Manufacturing and Inventories
Greenspan and other Fed policy makers have characterized the slowdown as mostlyaffecting manufacturing and mostly the result of companies trying to work off excessinventories. Even so, the drop in stocks may be the cause of broader weakness in the economy,said David Wyss, chief economist at Standard & Poor's in New York, who expects athree-quarter-point cut. Greenspan's job ``isn't to save the stock market,'' he said. ``It'sto save economy from the stock market.'' Ten of the 25 bond dealers who trade directly with the Fed changed their forecasts lastweek to a three-quarter-point cut as stocks slid further. Trading in federal funds futuresshows investors expect the overnight rate to average 4.82 percent in April -- almostthree-quarters point below the current rate. ``The Fed tends to give the market what it wants and the market is clamoring'' for athree-quarter-point reduction, said Cary Leahey, senior economist at Deutsche BankSecurities Inc. in New York.
Stocks May Fall
Stocks probably will fall if policy makers cut by just a half point, though it might beonly a temporary disappointment, Jones said. Worse would be if the Fed cuts three-quarters of a point and stocks still drop further, he said. ``Then you've shot yourammunition.'' Jones said it would be smarter for Greenspan to cut by a half point tomorrow and thenperhaps by a quarter point some time in April -- before the Fed's next policy meetingin mid-May. ``It seems to me, that preserves his options,'' Jones said. A three-quarter-point cut might also look like a panic step. During Greenspan's morethan 13 years as Fed chairman, the central bank has never cut the overnight rate somuch in one day. Central bankers came close to such a move in December 1991, as the economy wastrying to dig out of the last recession. In a two-week period, the Fed chopped theovernight rate from 4.75 percent to 4 percent. That same month, the central bank cutits more symbolic discount rate on direct loans to banks by a full percentage point inone day. Even Wyss said a larger rate cut poses a risk for the Fed that investors will startcounting on it to always meet market expectations. ``If the Fed does three-quarters,they'll be disappointed when the Fed doesn't do three-quarters the next time.''