Time to Look at Rate Cuts

Alan Greenspan’s testimony to the Senate Wednesday was frank and telling in his acknowledgment that the “great uncertainty around the globe” has reached the United States and is chilling our markets as well. The Federal Reserve Board chairman noted, “Flows of funds through financial markets have been disrupted at least temporarily. Issuance of equity and of bonds by lower-rated corporations has come virtually to a halt; even investment-grade companies have cut back substantially on their borrowings in capital markets. Banks also are reportedly becoming more cautious and more expensive lenders to many companies.”

In short, U.S. business is pulling back and credit is getting tight. These changing circumstances amid global instability should prompt the Fed to cut interest rates, for while the American economy remains fundamentally sound, growth is slowing and could turn sluggish without the kick of lower rates. Lower borrowing costs would help businesses, especially those hard hit by the Asian financial crisis. Cheaper loan rates for consumers would encourage spending and help U.S. companies.

The Fed, ever worried that the cheaper borrowing costs might fuel inflation, should take a signal from Greenspan, who noted that American inflation is being checked by deteriorating foreign economies and their spillover to U.S. markets. A rate cut would not only help U.S. business and consumers but would aid other countries in strengthening their currencies.

Greenspan, of course, said nothing specifically about interest rates. He did, however, outline the vast changes in financial products and the speed of capital and information flow that results from computer and telecommunications technologies. He called for a new set of standards for participation in what he described as “the new highly sensitive international financial system.” Those discussions should begin.