Archive for Wednesday, December 20, 2000

Fed retains interest rates

Central Bank signals recession concerns, future cuts

December 20, 2000


— The Federal Reserve, concerned about spreading economic weakness, sent a strong signal Tuesday that it was ready to start cutting interest rates to make sure America's record-long expansion doesn't topple into recession.

Many private economists said a rate cut in January was a virtual certainty.

Financial markets, which usually are cheered by the prospect of lower interest rates, instead fell on Tuesday's announcement. Overly optimistic investors had been looking for the rate cuts to start immediately.

Although the Fed did not reduce rates at Tuesday's meeting, Chairman Alan Greenspan and his colleagues did announce an important shift of focus, away from worrying about inflation to worrying about the threat of a recession.

For the first time in two years, the Fed said it perceived the balance of risks as "weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

Recent economic statistics have indicated that the economy, which already had slowed dramatically during the summer, has been running into even more troubles. Among them: falling consumer confidence, rising job layoffs, weak retail sales and disappointing corporate profits.

In its statement, the Fed cited a long list of economic threats including "the drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings and stress in some segments of the financial markets."

Analysts said the recitation of problems underscored the Fed's concerns about its ability to engineer a "soft landing" in which it would use interest- rate increases to slow the economy just enough to keep inflation under control. The Fed raised rates six times from June 1999 to May of this year.


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