Analysts expect Federal Reserve Board Chairman Alan Greenspan to push for
another bold half-point interest rate cut to combat slowing growth as board members hold a two-day meeting in Washington Tuesday.
Last week, Greenspan noted to Congress that economic growth at
present is probably "very close to zero."
"That was a strong message ... that he will continue to be
aggressive in easing monetary policy," said Mark Zandi, chief
economist for Economy.com, a consulting firm.
An announcement of the cut is expected to come Wednesday from the Federal Open Market Committee, comprised of Fed board members, including Greenspan, and presidents of the Fed's
President Bush ducked a question at the White House Wednesday about his opinion on possible central bank action, saying that he had made a mistake when he expressed approval for the Fed's first rate cut on Jan. 3.
"He's an independent voice and needs to be an independent voice," the president said.
Zandi and other economists expect a decrease in the federal funds rate from 6 percent to 5.50 percent, and some predict a drop to 5 percent or lower by May or June, depending on the cuts' effectiveness in spurring growth.
Some analysts didn't rule out a less dramatic, quarter-point
rate reduction at this meeting, the Fed's first regularly scheduled
session of the new year.
Commercial banks are likely to follow the Fed by cutting their prime lending rates, which now stand at 9 percent. By lowering borrowing costs for thousands of businesses and individuals, the Fed aims to spur business
investment and consumer spending, which would in turn boost
Testifying Thursday before the Senate Budget Committee,
Greenspan offered a pessimistic assessment of current economic
conditions. "As far as we can judge, we have had a very dramatic
slowing down and, indeed, we are probably very close to zero at
this particular moment," he said.
Greenspan didn't rule out a recession, saying that would depend
on whether the economy's "marked decline breaches consumer
As if on cue, consumer confidence
fell sharply in January, plunging to its lowest level in four
years, an industry group reported Tuesday.
The Consumer Confidence Index dropped more than 14 points to
114.4, the lowest level since December 1996 when it was 114.2, the
Conference Board said.
The big question is whether rate cuts by the Fed will be enough
to avert a full-blown recession, analysts said.
Sung Won Sohn, chief economist at Wells Fargo, was optimistic.
"I still think we will avoid a recession, but it is going to be a
high-wire act," Sohn said.
Some economists believe the economy's sharp slowdown was a
factor in Greenspan's blessing for a government tax-cut regime. His
comments gave a major boost to President Bush's $1.6 trillion
across-the-board tax cut proposal.
Economists said the Fed has a lot of flexibility in cutting
rates now because inflation remains tame, except for a burst of
higher energy prices.
"I think the Fed views this as an opportunity to be able to
lower rates without ... jeopardizing the good, restrained inflation
the country now enjoys," said Stuart Hoffman, chief economist for
PNC Financial Services Group.
Fearful about the weakening economy, the Fed, in a rare move
between regularly scheduled meetings, cut interest rates by a
half-point on Jan. 3, the biggest cut in more than eight years.
The Associated Press contributed to this report