More Rate Cuts Are In the Air As Fed Meets
Tuesday, members of the Federal Reserve Board's Open Market Committee will debate whether to nudge interest rates lower.
"The issue will be: |Yes, we've moved, but have we moved enough?,'" said Paul Kasriel, an economist at Northern Trust Co. in Chicago.
One thing seems certain: With the economy limp, there is no way the committee will increase rates. "There is zero probability of tightening," said Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles.
While few experts foresee an immediate cut in the discount rate, the committee is widely expected to leave the door open for Fed Chairman Alan Greenspan to push the fed funds rate lower by at least a quarter of a percentage point.
The FOMC, consisting of the seven Fed governors and five of the 12 regional bank presidents, is keenly aware that further economic stimulus may be needed. The most recent evidence came in a surprisingly weak employment report for July and sharp declines in key money supply figures.
Big Rate Declines
The Fed has already engineered a massive reduction in interest rates, pushing the federal funds rate down 275 basis points since last summer. It also has reduced the discount rate three times, to 5.5%. But economists say further interest rate cuts may be needed in coming months.
"You could build a case for another round of easing," said Gary Schlossberg, an economist at the bank subsidiary of Wells Fargo & Co.
Despite a debate about the pertinence of certain measures of the money supply, experts are taking note that M2 has slowed considerably. M2, consisting mostly of checking and savings accounts, has risen a meager 3.0% this year, at the low end of the Fed's target growth range of 2.5% to 6.5%.
M2 in Decline
Adjusted for inflation, M2 has actually fallen. Some economists, concerned about the decline, argued that the money supply must grow substantially to fill the economy with enough cash to encourage more purchases of goods and services.
Another troubling concern for the Fed is its inability to spur lending despite lower rates. The easing has fattened up banks' interest margins but done little for cash-hungry businesses. Commercial lending in the first six months of the year fell at a 5.35% annualized rate, according to the WEFA Group.
Lending further credence to the argument that the economy needs stimulus, initial claims for benefits by unemployed people rose last week by 8,000, to 408,000. That comes on the heels of July's employment report, which showed that business payrolls declined by 51,000.
Weak Economic Data
And the latest auto sales data showed vehicle sales plunging 9.4% in early August, suggesting that consumers may not be able to sustain strong spending habits.
"The economic numbers suggest growth has become softer," said Mr. Schlossberg. "It might be a little too sluggish for the Fed."