Gloomy Data Push the Fed To Ease Rate
The Federal Reserve eased interest rates again Friday, boosting the bond market but leaving economists and other Fed watchers skeptical that the central bank's actions would be enough to get the economy moving.
The Fed intervened in the Treasury securities market to signal its intention to cut the target rate for federal funds to 4.5%, from 4.75%. The rate is what banks charge each other for lending overnight reserves.
The move came after the government's report that nonfarm payrolls in November fell by 241,000, the biggest drop since March.
Greenspan Weighs In
Meanwhile, in a speech in Florida, Fed Chairman Alan Greenspan made one of his strongest acknowledgments to date that the economy has lost momentum, in part due to tight bank credit and borrowers' caution.
"The economic recovery, which seemed to be gathering momentum and spark during the summer, more recently has shown signs of faltering," Mr. Greenspan told the Securities Industry Association annual convention in Boca Raton.
Credit is "now restricted for a broad range of real estate and non-real-estate-related firms," he said, adding: "Many creditworthy borrowers face significantly stiffer terms and standards, and some find credit simply unavailable, with potentially adverse implications for the economy."
Mr. Greenspan expressed confidence that current economic policies and trends are "laying the groundwork for a more efficient, growing economy" with inflation tamed.
He also reiterated support for bank regulators who have been under fire for contributing to a credit crunch - provided that examiners' actions do not constrict loans to creditworthy borrowers.
Friday's drop in the target for fed funds was the ninth this year. But experts said lower short-term interest rates are not the medicine the ailing economy needs.
Can't Ignore Debt Burden
Some are more concerned about high levels of debt.
"I think fed funds at 2% will not get the economy going again," said one fed funds broker. "I think we just have to wring some of the debt out of the system. The economy is overborrowed."
In this vein, Mr. Greenspan referred to "a heavy overhang of debt, an accumulation of bad loans and doubts about the future."
"Some of the fall in demand represents an implication of shifting incentives for carrying debt, rather than a response to a reduction in actual or intended spending," he said.
Concern about private and public debt does seem to be keeping long-term rates relatively high. Traders, aware that the budget deficit is enormous and the government will have to keep borrowing to finance its shortfalls, are reluctant to pay high prices for long-term bonds.
Effect on Long-Term Rates
If long-term rates do not fall, companies and individuals will have little incentive to borrow and spend more, so a dramatic pickup in spending is unlikely.
Treasury Secretary Nicholas Brady apparently wants to try to bring down long-term rates. In congressional hearings last Thursday, he said the Treasury was "taking a look at" a cut in the size of long-term Treasury auctions.
Such a move would reduce the supply of new long-term bonds, which could push prices up and yields down on outstanding securities.
Looking for Fiscal Stimulus
But some observers believe fiscal stimulus is called for.
Charles Lieberman, managing director for financial markets research at Manufacturers Hanover Securities Corp., said, "The economy could use either a one-year cut in income taxes or a one-year cut in payroll taxes. The name of the game is going to have to be adding to consumers' disposable incomes."
Ward McCarthy, a managing director at Stone & McCarthy Research Associates, said he supports a tax cut but added, "Letting the budget deficit grow makes that very difficult."
Treasury Secretary Brady and Robert Parry, president of the Federal Reserve Bank of San Francisco, both said last week, before the fed funds move, that the Fed had more room to reduce rates. Mr. Brady said real interest rates are high enough to provide flexibility, and Mr. Parry cited the latitude that comes from a decline in the underlying rate of inflation.
This article includes contributions from Debra Cope in Washington, Dow Jones, and Reuters.