INTEREST RATES CUT YET AGAIN
August 22, 2001

Alan has ceased to surprise.

At the Federal Open Market Committee meeting this week, Greenspan and Co. lowered the federal funds rate (the rate at which commercial banks lend to each other) to 3.5 percent and watched the stock market react with studied indifference. In fact, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq all fell, as investors discerned no glimmer of hope in the Fed's widely-anticipated action: the decision to lower rates yet again, they felt, only underscored the Fed's inability to restore the economy's flagging fortunes.

Since the beginning of the year, the Fed has reduced interest rates from 6.5 percent to 3.5 percent with little to show for it. The U.S. economy, which entered a period of torpor in the second half of 2000, has continued its despondent ways this year, with economic growth slowing to a crawl in the second quarter of 2001 and showing few signs to suggest any recovery in the near future. Most forecasters, discarding their overly rosy projections of a few months ago, now envision two more quarters of lackluster economic activity and a resurgence gradually occurring only in 2002.

In the meantime, the federal budget surplus, once wondrously huge at over $200 billion, is rapidly being whittled away. Democrats excoriate Bush for his extravagant tax policy–tilted sharply towards the rich, they argue, the tax cuts have denuded the Treasury's coffers. Republicans, somewhat on the defensive, counter that the tax cuts till now have been quite modest (about $70 billion) and anyway, the Senate Democrats wanted to dole out even larger rebates, didn't they?

The petty wrangling in Washington notwithstanding, the tax rebates might actually serve to boost consumer spending, thus providing a fillip to the economy. With energy prices on the decline (although, of late, they have shown disturbing signs to the contrary) and the Fed's rate cuts likely to make themselves felt, the economy's prospects are not altogether dim.

In October, the FOMC will meet again. If the economy has not roused itself from stupor by then, Alan is likely to offer yet another dose of interest-rate cuts. It will probably surprise nobody.