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...Federal Reserve Open Market Committee is loading its monetary gun again this week, having settled in for a two-day sit-down Tuesday that will result - on Wednesday at the usual 2:15 ET unveiling - in another interest-rate cut. The Fed funds rate stands at 4 percent, and it's going lower. That much we know. The question is, how much lower? And, even more important, when the heck are these things going to start working...
...that's where the Fed is at as it contemplates whether to cut rates by another half-point (50 basis points) or whether it's time to ease off on the throttle with a quarter-point cut (25 basis points). Wall Street, its ears ringing with the daily dirges of the tech and manufacturing sectors alike, would very much prefer another 50-basis-point lopping, but the betting seems to be settling on a 25-pointer, for several reasons...
...contributed some 90% of GDP growth in recent quarters. And consumers stand to get a big boost from what Berner calls "the most stimulative set of economic policies that we've seen in two decades"--a reference to the tax cut and the five interest-rate reductions the Fed has made since January. While tax rebates in the past haven't done much to stimulate the economy, since consumers saved a huge chunk of the money, Berner says this time could be different. More of the rebates will be spent "because people will tend to view them as a down...
...capacity--the lowest level in a decade--Shepherdson said consumers are growing nervous about future inflation thanks to soaring gasoline and electricity prices and a surprisingly strong housing market. "Surveys of consumers suggest that inflation expectations have risen quite substantially," he says. And he is concerned that the Fed's rate cuts could leave the impression that the central bank no longer fears inflation--a perception that could cause companies to agree to demands for big wage hikes...
Looking further ahead, TIME's board expects the Fed to resume its anti-inflation stance as the economy recovers and raise interest rates in 2002. According to Berner and Shepherdson, the central bank may do that as soon as next spring. While higher rates would raise the cost of mortgages, car loans and credit-card debt, they would also signal to Americans that the sharpest slowdown in a decade is behind them. It may be safe to feel more exuberant again...