Posted on 11/06/2002 11:19:59 AM PST by fm1
WASHINGTON (CBS.MW) - The Federal Reserve cut interest rates Wednesday to try to get the economy humming again.
By cutting the federal funds target rate to 1.25 percent, the Fed hopes to boost consumer and investor confidence and pump more money into an anemic economy.
"Greater uncertainty, in part attributable to heightened geo-political risks, is inhibiting spending, production and employment the Fed said.
The vote for such action was unanimous.
The group said the risks in the economy are now balanced.
It was the first rate cut since December. The Federal Open Market Committee had cut rates 11 times in 2001, bringing the fed funds rate from 6.50 percent to 1.75 percent.
The move was expected on Wall Street. Forecasters were nearly unanimous in their belief that the FOMC would ease monetary policy Wednesday.
Financial markets had fully priced in a 25 basis point cut and were hedging their bets that the cut would be an aggressive 50 basis point cut.
The federal funds rate is the interest rate banks charge each other for overnight loans. The Fed targets this rate by buying or selling Treasurys in the open market. To goose the economy, the Fed adds money to the system. To contract the economy, the Fed takes money out. Read more about monetary policy.
The economy officially entered a recession in March 2001 after months of slipping industrial production and falling stock prices.
The FOMC had held its fire since last December. It is likely that the private-sector National Bureau of Economic Research will eventually determine that the recession ended in December or January -- if the economy doesn't dip back into a recession now.
The NBER said Tuesday that the recession "may have come to an end," but would wait to make its decision.
The FOMC has been warning since August that the main risk to the economy is a relapse, signaling its intention to cut rates again if the economy appears to be worsening. Even before the FOMC changed its official risk assessment, the committee had said the most likely outcome was a tepid recovery, with uncertain growth in consumer spending and capital investment remaining weak for months.
At the Sept. 24 meeting, two of the 12 FOMC members -- Gov. Edward Gramlich and Dallas Fed President Robert McTeer -- voted in favor of an immediate rate cut. It was the first time a Fed governor had dissented in seven years.
The Fed's 11 rate cuts pushed down market interest rates. Automakers offered zero-percent financing on many new cars, which drove sales to record levels. Mortgage rates, too, fell to historic lows, keeping the residential construction and real-estate markets booming.
Throughout the recession, consumers maintained a steady pace of spending, an unusual occurrence in a most unusual business cycle. Consumers' incomes never faltered, due to a timely tax rebate and tax cut and to a relatively low unemployment rate even in the depths of the recession.
But now the evidence shows that consumers have become inured to low rates. Auto sales have fallen back. Retail sales have slowed. Consumer confidence has fallen to nine-year lows, as the bear market and war talk take their toll on consumer psyches.
Some worry that rate cuts wouldn't spur consumer demand because consumers are heavily indebted at the same time they are trying to save more to make up for the pathetic performance of their stock portfolios.
Consumer spending has propped up the economy, which has grown 3 percent in the past year. Growth is uneven, however. In the third quarter, spending on cars accounted for more than half of the 3.1 percent growth rate.
The low interest rates never really benefited businesses. The spread between Treasury yields and corporate bond yields widened, as creditors began asking tough questions about inflated balance sheets.
Companies didn't face a full-fledged credit crunch; neither was there much demand for credit to expand businesses. Companies had to work off their inventories first. Without a pickup in demand, companies had no incentive to invest in new buildings or equipment or to hire workers.
Hope you don't daytrade.. : )
If nominal prices are perceived to be falling, people might choose to delay purchases in exchange for real appreciation of the money they hold.
No fear is necessary.
Sure, or they might just decide to make even more phone calls on their new cell phones since prices got even cheaper.In general, the speed of money INCREASES when prices fall (i.e. deflation) and decreases when prices rise (i.e. inflation), although there are exceptions to both rules.
For instance, drop the price on a house or a car low enough and you WILL sell it this month, even if it's been sitting around at a higher price for months or years.
Seriously, the market is shrugging off this "surprise" move. Even now, the market is only up 1%. Really this is a non-event as many know it won't do any good.
If you drop the real price, yes.
Similarly, an unemployed worker will find employment if he or she drops the price of their labor enough.
Whether declining prices is a good or bad thing entirely depends on which side of the transaction you're on.
Yea, you're probably right.. though, hopefully with the GOP controlling the Senate some bigger steps will be forthcoming (e.g. tax cuts..)
Nonsense. Both parties, the buyer and the seller, must be more pleased to have the transaction than to NOT have it, or else they wouldn't agree to make it in the first place.
True, but irrelevant.
Irrevelant?! Pity, that means that you didn't understand the reply.Your claim was that declining prices might be good for either the buyer or the seller (of items, wages, services, etc.).
What I pointed out was that making the transaction happen with a lower price was BETTER (i.e. good) for both parties (than not doing the transaction at all).
Ahhh, what the heck. Your mind is made up and you don't want to see reality. Resume wearing your dark-tinted glasses.
Let's try again:
"For instance, drop the price on a house or a car low enough and you WILL sell it this month, even if it's been sitting around at a higher price for months or years."
Whether that's a good thing or a bad thing depends on the nominal price at which I bought the house, and how many dollars of principle remain on my mortgage, if any.
Similarly, an unemployed worker will find employment if he sufficiently lowers his asking price for his labor in the face of general deflation. Granted, this is better than being unemployed. However, it's certainly a bad turn of affairs if the worker has any nominal-dollar-denominated debts that have now appreciated in real terms, and most likely involves a step down in his standard of living prior to the deflation.
A jump up in the value of money transfers wealth from holders of dollar-denominated assets and debtors to holders of dollars and creditors. A jump down does the reverse.
Now it has been said that as long as the deflation/inflation rate is constant it can be rationally adjusted for without great dislocation. However, as Milton Friedman and others have explained, this ignores the fact that deflation/inflation are not felt everywhere equally and simultaneously. When government deliberately inflates the currency for example, the government and the first few recipients of government money experience an increase in purchasing power (and everyone else a relative decrease), as they are able to purchase goods and services with their new dollars at prices which are not yet inflated.
These are distortions that take place even at constant rates of change in the value of the currency. Deflation/inflation are never good. The policy goals to be pursued are flat yield curves and constant currency.
So what causes fear, oh wise one?
And what about relationships that involve a time duration. Like the relations between debtors and creditors.
Deflation is devasting to debtors and the Feds are the biggest debtors in the room. This is why they like to debase the currency whenever possible.
That game may well be ending.
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