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News > Economy
Hoping for Fed rate cut
January 30, 2001: 11:44 a.m. ET

Fed begins two-day meeting amid further signs of economic weakness
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NEW YORK (CNNfn) - The Federal Reserve began a two-day meeting Tuesday, with many experts forecasting another aggressive cut in interest rates amid further signs that the U.S. economy is floundering.

Members of the Federal Open Market Committee, the Fed's policy-making arm, began meeting behind closed doors at 9 a.m. ET in their first regularly scheduled meeting of the year. They are expected to announce a decision Wednesday afternoon, although a rate change could come at any time.

Most economists predict the Fed will slash rates by half a percentage point, which would bring the federal funds rate, the interest banks charge one another, to 5.5 percent from 6 percent. That would put interest rates at their lowest level in 13 months. The Fed typically moves rates in smaller, quarter-point increments, but the central bank signaled earlier this month with a surprise half-point interest rate cut that it is willing to move in broader strokes.

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graphicCNNfn's Peter Viles reports from Washington on expected rate cut.
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But some economists think even more dramatic action may be necessary. Shortly after the meeting began Tuesday, a private research group released data showing that consumer confidence has plunged to its lowest level in more than four years. Former Fed governor Robert Heller told CNNfn that a rate cut of at least three-quarters of a percentage point, or 75 basis points, may be required to revive the slowing economy.


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"Fifty basis points are in the bag," he said. "And given today's bad news about consumer confidence it may well be 75 or even 100 basis points."

If the Fed does cut rates, it would be the second such rate reduction in less than a month. The central bank surprised nearly everyone by slashing rates half a point on Jan. 3 and signaling it would cut them further in a bid to give the economy a lift and ward off a possible recession.

graphicThe Fed acted earlier this month shortly after the National Association of Purchasing Management (NAPM) released data showing manufacturing in a five-month slump that worsened in December.

And analysts say manufacturing is one area the Fed will focus on as it decides what to do next with interest rates.

"The Fed watches everything, but certainly the weakest sector is manufacturing," said Steve Slifer, chief financial market economist with Lehman Brothers. "We have a bunch of little hints that things are doing better but they (the Fed) don't have to look very far to find the other pieces that show things are very weak."

David Jones, chief economist with Aubrey G. Lanston, told CNNfn's Ahead of the Curve that he expects a rate cut, but "all bets are off" on just how much Greenspan and company will lower rates. (334K WAV) (334K AIFF)

Other economic reports due this week include the fourth-quarter gross domestic product, the broadest measure of the nation's economy. Analysts polled by Briefing.com forecast GDP grew at a 2.3 percent rate in the quarter, up from the prior quarter's 2.2 percent.

graphicAlso high on the agenda is Thursday's NAPM survey for January, expected to slip to 43.8 percent according to analysts polled by Briefing.com. The NAPM for December showed output levels at their worst since the 1991 recession, reaching 44.3 percent, well below November. A reading below 50 points to contraction in manufacturing.

The December jobs report is slated for release Friday. With U.S. companies reporting thousands of job cuts, the unemployment rate may start to creep up.

Zero growth?

The Fed meeting follows Greenspan's headline-grabbing testimony before  Congress last week, in which he said U.S. economic growth is "very close to zero" and called for using some of the projected budget surplus for tax cuts.

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  Consumer spending is way down so that may be the most critical thing they'll look at.  
     
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  Greg Valliere
political economist
Charles Schwab Washington Research Group
 
"I think Greenspan, last Thursday, really sent a signal that he wants 50 basis points," said Greg Valliere, political economist at Charles Schwab. "By saying that the GDP (gross domestic product) growth is close to zero, he certainly encouraged the belief that we get half a point."

Lower rates tend to spur spending by businesses and consumers, boosting economic growth and corporate profits, and also usually lifting stock prices.

Before January's surprise cut, the last time the central bank lowered rates was in November 1998, the third in a string of rate reductions aimed at combating the credit crunch after the Russian debt crisis and the collapse of Long Term Capital Management, a risky hedge fund for wealthy investors.

The series of rate cuts were followed by six interest rate increases between June 1999 and May 2000 as the Fed tapped on the brakes in a bid to slow what was then red-hot economic growth and ward off inflation.

Stocks cautious

Stocks traded flat Tuesday in anticipation of the Fed's decision. Spurred in part by the Fed's surprise rate cut in early January, the battered Nasdaq composite index has surged about 14 percent so far this year, while the Dow Jones industrial average has gained nearly 3 percent and the S&P 500 has jumped 5 percent.

Analysts say if the Fed cuts rates less than a half point, Wall Street will not react kindly.

"If the Fed chooses to do something less than that (half-percentage point), then you're going to have this major disappointment in the financial markets," Lehman's Slifer said.

He said signs of economic recovery would be damaged by only a quarter point cut, adding "that's the last thing the Fed would want." graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.