Fed Cuts Interest Rates Again
The Federal Reserve Bank has cut the interest banks charge each other on overnight loans—a key interest rate—by another half percentage point, to 5.5 percent, as the central bank’s campaign against a possible recession in the first half of 2001 continued.
The Jan. 31 move by the Fed’s Open Market Committee was widely expected, but it followed an unscheduled meeting by the same committee on Jan. 3, when it mandated a dramatic and unexpected half-point cut in the overnight rate, from 6.5 percent to 6.0 percent. That was the Fed’s first rate cut after several interest-rate raises and it marked the beginning of the Fed’s shift away from its long-standing anti-inflationary focus to its present focus on avoiding a recession. In a statement accompanying this second rate cut in a month, the Fed took note of rapidly changing economic circumstances that “called for a rapid and forceful response of monetary policy.”
Perhaps chief among those changed circumstances is the precipitous drop in consumer confidence. The closely watched Consumer Confidence Index (CCI) plunged to 114.4 in January, its lowest level since December 1996. Just this past September, the New York-based Conference Board’s CCI stood at 142.5. Perhaps even more significant, the Conference Board’s Consumer Expectation Index, a measure of consumers’ feelings about the near term future and therefore also a measure of their willingness to make purchases, dropped to 77.0 from 96.9 just one month before.
The prospect of a further drop in consumer demand, after the recent tepid holiday season, is one reason behind the surge in employee layoffs that has marked the new year. However, despite the downturn and the prospects of a slow- or no-growth first half in 2001, American workers began the year in a strong position. Workers’ wages and benefits rose 4.1 percent in 2000, the biggest annual increase since a 4.3 percent rise in 1991, according to the U.S. Labor Department.By comparison, the Consumer Price Index, a measure of what workers and others actually paid for various goods and services, rose just 3.4 percent in 2000. —Louis Chunovic
