WASHINGTON: As the Federal Reserve gears up to apparently cut US interest rates to 1958 levels, many economists are asking a simple question: Why?
There is little doubt about the outcome of the Fed’s two-day policy meeting that ends today – the central bank will lower overnight borrowing costs by either a quarter or half percentage point for the 13th time since early 2001.
But with signs that the US economy is starting to perk up, with new tax cuts about to fatten consumer wallets and with lots of money already sloshing around, some analysts believe another rate cut is unnecessary. Some even think the Fed could come to regret the move.
“I think the economy’s bouncing back,” said Mickey Levy, the chief financial economist at Banc of America Securities. “If you look simply at the economic data since the last (Fed) meeting and the amount of monetary and fiscal stimulus, a cut in rates probably is not necessary.”
Still, Levy and other economists noted that the Fed had made its plans to cut rates clear. “I don’t see the need, but I’m sure they will ease,” he said.
Richard DeKaser, the chief economist at National City Corp in Cleveland, agreed, saying Fed chairman Alan Greenspan’s economic diagnosis earlier this year that war worries were weighing on the economy was on the mark.
“I think that we’ve got an improvement on the cards simply because the uncertainty that has been weighing on business decision-making is quickly in retreat, and I see a natural return to spending and hiring,” he said.
DeKaser was among a panel of US bank economists that forecast an economic pick-up.
While the panel unanimously forecast the Fed would cut rates from the 42-year low of 1.25% this week, seven of the 11 members thought the move unnecessary.
Optimists cite several signs suggesting the US economy is strengthening. Factory output rose in May after two straight drops, mortgage refinancings are booming, retail spending has held up, the job market is stabilising, and housing activity remains robust.
Still, others counter that the evidence so far of quickened growth is sparse, with no clear sign of a big post-Iraq war bounce.
“If you’re an optimist, you can look at some of these tentative signs and say things are getting better. If you’re a pessimist, you can say things are still pretty weak,” said Rick Egelton, an economist at BMO Financial Group in Toronto.
Egelton said the ample fiscal and monetary stimulus made him confident that the recovery’s pace was set to quicken.
“I think there’s so much baked in the cake,” he said. “Six to nine months from now we may look back at this and say, ‘Wow, there’s a lot of stimulus in the system and we underestimated the strength of the recovery.’''
However, Fed policy-makers are aware that forecasts have disappointed before in the up-and-down recovery. They have suggested a reluctance to hold off on cutting rates based on what is still largely just a projection of faster growth. – Reuters