WASHINGTON: The US Federal Reserve may soon be forced to cut interest rates again, driving them to the lowest level since Dwight Eisenhower was president, amid fears that the shaky American economy is about to fall back into recession.
Concerns about the anaemic recovery from the 2001 downturn have been heightened by last week’s report that unemployment had risen to 5.8% in February, with a big loss of 308,000 jobs.
“Prior to the unemployment report, we thought the Fed would stay on hold for some months to come and the next move would be a rate hike, not a rate cut,” said Louis Crandall, the chief economist at Wrightson ICAP, a bond market research company. Now, Crandall said, he was forecasting a quarter-point rate cut at the March 18 Fed meeting.
The Fed last cut interest rates on Nov 6, when it slashed its target for the federal funds rate – the interest that banks charge each other on overnight loans – to 1.25%, the lowest average since 1.17% in July 1961.
The funds rate has not been lower than 1% since it averaged 0.68% in July 1958, when Eisenhower was president.
Some economists believe the Fed might cut rates by a half-point, the same move it made in November, when it cited the drag on the economy from “geopolitical risks” such as worries about a possible war in Iraq.
Before the dismal unemployment report, most economists were of the view that the Fed would stand pat in March, as it did in December and January, believing that it had already done enough to guarantee the economy would rebound more strongly once the uncertainty of war was removed.
Fed chairman Alan Greenspan even told Congress in mid-February that President George W. Bush’s economic stimulus package of new tax cuts would probably not be needed because the economy would begin growing at healthier rates once businesses grew more confident and began increasing their investment spending.
But the job losses in February were so dramatic that analysts quickly lowered their growth estimates, with those at J.P. Morgan slashing their forecast for growth in the first six months of this year from 3% to 1.5%.
Financial markets were also quick to respond to the jobless report, with federal funds contracts – bets on future Fed rate moves – putting the possibility of a March rate cut above 50% on Monday, up from 22% before the jobless report was released.
Many economists said that even if the Fed did not cut rates at the March meeting, policy-makers could use an emergency telephone conference call to change rates between meetings. The next discussion on interest rates after March will not occur until May 6. – AP