3 October 2001, 10:27  Economists: Fed rate cuts just shoring up economy for now

NEW YORK (AP) - Aggressive interest rate cuts begun by the Federal Reserve in January have been partially negated by last month's terrorist attacks, just as they were trickling into the economy, analysts said.
Problems present before the attacks and the plunge in confidence that has followed, means the Fed's ninth rate cut of the year Tuesday will only help steady the economy, not fuel it forward, economists said.
"Eventually the economic policies will work. I think there's little doubt that that will happen," Oscar Gonzalez, an economist with John Hancock Financial Services in Boston, said Tuesday. "When and how soon and how fast ... nobody really knows because we are essentially in uncharted territory," he said.
Tuesday's 0.5 percentage-point cut pares the federal funds rate - the rate banks charge each other on overnight loans - to 2.5 percent. That takes the rate to a level not seen since 1962.
While the seven interest-rate cuts before the attacks had produced few tangible improvements in the economy, analysts said that does not mean such cuts are ineffective, just slow in working. "We were just getting to the point this quarter where lower rates were probably going to help the economy," said Gary Thayer, chief economist with A.G. Edwards & Sons Inc. in St. Louis. Before the attacks, the first evidence of a turnaround was in recent reports on manufacturing showing an improvement in new orders, he said. The Fed's stimulus arguably had helped many companies avoid bankruptcy and insolvency since it made it easier to float bonds or borrow, said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.
Low interest rates, notable in the terms of mortgages available to home buyers, also had fostered continued consumer spending, which accounts for two-thirds of all economic activity. That gave businesses time to work through problems and reduce built-up product inventories.
Before the attacks, businesses were finding some problems difficult to solve. Most still had not figured out what to do about huge investments in fiberoptics and other technology that simply was not needed, economists said.
Lower interest rates did not solve that problem, because such policy is useful for fueling demand, but not reducing excess capacity, Sohn said.
Those problems were already holding the economy back - and then terrorists struck. That has forced the Fed to act just to ensure there is no further backslide. Even so, many analysts expect an economy that was already on the edge to teeter into recession. "Consumer and business confidence is key. That's what has been lacking and sliding," Sohn said. "The Fed can do a great deal to help prevent that confidence from sliding."
If confidence can be propped up now, then the interest rate cuts made by the Fed in the spring and summer will eventually help lift the economy, analysts said.
Fed rate cuts alone, though, may not be sufficient to dislodge the economy from the shoals.
"Interest-rate policies are going to have an effect especially on the consumer side, but I think its going to be a lesser degree on the business side," said David Huether, chief economist for the National Association of Manufacturers, an industry trade group. Mitigating the shock of Sept. 11 may require the government to use fiscal policy - tax cuts and government spending - to boost the economy, he said.
Fed Chairman Alan Greenspan has urged the Bush administration and Congress to give rate cuts a chance to work instead, and some economists agree that the moves by the Fed may do the trick. Despite the crisis created by the attacks, they said, Fed interest-rate cuts have a proven history of working and will probably work again.
For a reminder of that, think back to the middle of last year. At that time, the economy was growing at an annual rate of more than 5 percent and some observers wondered aloud whether interest rate increases enacted by the Fed to keep the economy from overheating would be enough. "Unfortunately I think that is the nature of the beast," Gonzalez said. "Economic policy takes time."

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