Fed Acts as Economic Warning Signs Mount
The Federal Reserve, the central bank of the United States, has cut thekey overnight bank rate by half a percentage point, lowering itto 6.0. The surprise move to lower the interest on overnight loans that banks make to each other was the Fed’s first interest-rate decrease in twoyears, and it came a full four weeks ahead of the scheduled meeting of the Fed’s interest rate-setting Federal Open MarketCommittee (FOMC). The move represents another clear sign that the Fed has turned away from its concern with inflation and now is taking steps designed to prevent a recession. President-elect Bush called the Fed’s action “needed.” The Fed also cut its mostly symbolic discount rate on loans to commercialbanks by a quarter percent, dropping it to 5.75 percent. The cuts indicate how seriously the Federal Reserve takes the possibility of a recession. Other recent signs indicating a rapidly cooling economy include the following: The New York-based Conference Board’s closely watched Consumer Confidence Index (CCI) fell to 128.3 in December, its lowest level in two years. In January 2000, that Index stood at 144.7, the highest point in its history. The CCI is considered a good predictor of the short-term economic direction, because less-confident consumers tend to buy fewer goods and services. Salomon Smith Barney revised its December same-store forecast for discounters and department stores shortly after the worst retail holiday season in a decade or more to a mere 0.9 percent increase, down from its original estimate of 2.6 percent. The annual Kurt Salmon Associates’ (KSA) Soft Goods Outlook predicts aggregate apparel growth of just 3 percent for 2001. According to KSA, the “slowdown in retail sales, the absence of new fashion trends, and several economic and marketplace events in 2000—including CBI parity, the rise of the Internet and the granting of most-favored-nation status for China—have caused retailers to adopt a much more cautious, and in some cases pessimistic, view that may carry over into the first part of 2001.” Nonetheless, the overall outlook for the year ahead is “guardedly positive,” according to KSA, which cited the continuing implementation of “new business-to-business practices” and the Internet’s rapid evolution as reasons for optimism. The Fed’s action makes it that much more likely that KSA’s “guardedly positive” view will prove correct.
