Friday, August 08, 2003

On Tuesday, the General noted how some voices out there on Wall Street (and K Street) felt Greenspan & Co. had let them down in June, cutting the federal funds rate down only to 1.0% instead of the much more ambitious 0.75%. Now it seems everyone has given up on any more rate cuts, disappointed or not.
After a year and a half of a disappointing recovery from the 2001 recession, U.S. economic growth has finally begun to strengthen in a sustainable way, according to many economists and policymakers. As a result, Federal Reserve officials, who cut interest rates 13 times to fight the slump, aren't going to slash rates again when they meet next week, analysts and investors widely agree.
Instead, the Fed has decided to lean against any rate hikes as (if?) the economy heats up. With the core consumer price index running at a mere 1.0% annualized for 2003:II -- notably, the quarter with all the "growth" when one would expect disinflation to end -- raising the federal funds rate would be suicidal.

But if long-term interest rates keep going up, will the Fed try its magic one more time?
"There appears to be some possibility that the recent trend toward disinflation will continue, primarily because of the potentially large amount of economic slack in the system," Fed Governor Ben S. Bernanke said in a speech late last month.

And because Fed officials see the risk of further declines in inflation as outweighing the dangers of a surge in inflation, they will probably keep short-term rates low "for a considerable period," he said. . . . "In my view . . . we should be willing to cut the [overnight] rate to zero, should that prove necessary to provide the required support to the economy."
Remember, Bernanke was the one Fed Governor who voted for 0.75% back in June. Clearly another rate cut is not out of the question. If it comes, however, it will be out of desperation -- a sign that deflation is haunting this "recovery".

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