Pressure Grows on Fed to Ease Interest Rates
Just one month after the Federal Reserve Board eased interest rates to wake up a weary U.S. economy, economists proclaim that more help is needed--and promptly--to keep the aging expansion alive.
The bleak image of a sagging economy leaps out from recent data on jobs and industrial production. On top of that, disruptive winter weather has hit many parts of the country, keeping consumers out of stores that already suffered a lackluster holiday season. These factors are combining to focus intense pressure on the Fed’s policymaking committee to reduce rates again when it meets today and Wednesday.
“I think they’re going to lower rates, and I think they’re going to lower rates because the economy is slowing rather sharply,” said Paul A. Getman, an economist with Regional Financial Associates in West Chester, Pa.
Growing signs that the once-robust national expansion is faltering emerge from data on jobs, consumer spending and industrial production, to cite just a few areas of weakness.
But while economists widely expect the Fed to lower rates soon, perhaps by a quarter of a percentage point, they also cite reasons that the decision may be postponed for the moment. These include unusual gaps in knowledge because of government shutdowns that have interfered with the normal flow of official reports on the economy, and Fed Chairman Alan Greenspan’s noteworthy caution.
The U.S. economy, in recovery since the spring of 1991, began to slip last year, and the current growth rate looks extremely meager to most forecasters. Moreover, inflation appears tame, remaining under 3% for the year ended in November, according to the latest available data.
For many economists, the combination of fading growth with little inflation is an irresistible formula for lower rates.
“The Fed has probably been too tight for too long,” said Veronika White, an economist with First Union National Bank in Philadelphia. “Everything is slow, whether you look at the manufacturing sector or the consumer sector.”
The economy’s downshift has been dramatic. In December 1994, for example, industrial production was humming along at levels 6.5% above the previous year. But by last December, the factories were producing at just 1.1% above year-ago levels.
A similar story emerges from the job market. Payroll job gains averaged 294,000 a month in 1994. Last year the performance was less than half that rate: 141,000 a month. On Monday, a new survey by the National Assn. of Business Economists found 67% of respondents expecting sluggish growth over the next six months. Recent gauges of confidence, consumer spending and housing sales add further questions about the economy’s health.
Lower rates have the potential of being a tonic, however. Banks typically reduce their prime lending rates following a Fed easing, thereby easing costs for consumers and businesses and stimulating new purchases of everything from homes to personal computers.
The economy “clearly has entered a much slower growth track,” said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles. “We think it would be appropriate for the Federal Reserve to issue an insurance policy” in the form of lower rates this week, she added.
Until recently, Fed watchers widely expected the board to refrain from lowering rates until politicians in Washington achieved the long-elusive budget deal they have been haggling over for months.
But in announcing a quarter-point drop in rates in December, Greenspan seemed to be saying that the Fed would continue to shift monetary policy even if the White House and Congress remained at an impasse. Analysts said a key reason was growing concern within the Fed over the state of the economy.
Another reason was the realization that the deficit may continue to shrink this year, even without an all-encompassing budget deal, as Congress pushes ahead with strict appropriations bills.
Fed officials “made it very clear in December that they did not want monetary policy to be hostage to the budget negotiations,” Reaser said.
In addition, political realities, particularly because it is an election year, are bearing down on the Fed as it makes its next interest rate decision. “The Fed has to get the easing done long before the election, so the moves don’t look political,” said Philip Braverman, chief economist at DKB Securities in New York.
Some maintain that raw numbers alone make the case for lower rates, which by some reckonings are high relative to historical trends.
The current short-term federal funds rate of 5.5% appears about half a percentage point above long-term averages, some argue. Certainly, this belief is embedded in the financial markets, which are setting their own short-term rates for Treasury securities at about 5%.
“The markets are assuming that the Fed will ease by [half a percentage point] in the next few months, but they’re less confident than they have been that it will be at this particular meeting,” Braverman said.
The uncertainty can be traced to a few unusual factors. For one, government employees who put together economic statistics were among those deemed “nonessential” in recent shutdowns.
Even though they are now back at work, the information backlog remains: Fed policy-makers will have no estimate of growth in the October-December quarter to aid in their decision this week, no report on U.S. trade for November nor word on housing starts in December. (The 3.2% U.S. growth rate for July-September remains the most recent official growth estimate.)
Labor market information from October and November that typically would have been revised by now remains in less-reliable, preliminary form.
Winter weather has further complicated the picture, creating temporary headaches for businesses in the East and other areas.
“With the lack of data and the bad weather, it’s hard to tell what’s going on in the economy right now,” said Lyle E. Gramley, consulting economist with the Mortgage Bankers Assn. and a former governor of the Fed.
Yet another complication for Greenspan could come Wednesday, the second day of the Fed meeting, when the government announces wholesale prices for December. Many forecasters anticipate an unusual spike in inflation, caused by winter-related effects on energy prices and volatile food prices.
“They ought to take that little surge as temporary, but the Fed has a tendency to be cautious,” said White of First Union National Bank. Then she added: “I think Mr. Greenspan will do the right thing--which is to ease.”
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Fluctuating Funds Rate
The Federal Reserve Board is under intense pressure to trim its federal funds rate--the overnight loan rate among banks--to prop up the sagging national economy. A look at fluctuations in the federal funds rate over the last two years:
Monday: 5.5%
Source: Bloomberg Business News
Researched by JENNIFER OLDHAM / Los Angeles Times
