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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