Sat, Mar 31, 2001 EST
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Sagging Economy Gives Fed
Reason to Cut Interest Rates

Fox Market Wire
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Facing a quickly souring economy and an eroding manufacturing base, the Federal Reserve may soon intervene to try and reinvigorate America's marketplace by making bold slashes in interest rates, economists predicted Friday.

Federal reserve policymakers meeting Tuesday will be confronted by the latest in economic news, both the good and the bad: wholesale prices remained flat, but factory production plummeted February.

The good news is that because there was scarcely any inflation, the risk of an interest-rate spurring overall price hikes is low, analysts said. Not only would that boost the overall economy, it would help out with the bad news. Manufacturing is doing so badly that some believe it's actually in recession.

"The rot is spreading in manufacturing," David Wyss, chief economist at Standard and Poor's DRI said. "The economy just doesn't seem to be moving."

What the combined one-two punch from February's snapshot means is that Fed chairman Alan Greenspan may cut interest rates by an extreme and extremely rare three-quarters of a percentage point next week, analysts said.

"I'd say there is a 60 percent probability of a three-quarter point reduction on Tuesday," Lynn Reaser, chief economist at Banc of America Capital Management, said.

The Federal Reserve has already slashed interest rates twice in January, totaling a full percentage point, in its attempt to stave off recession. One reason cited by Fed policy-makers for being able to act so aggressively was that inflation — outside the burst in energy prices — had remained in check.

Of course, there's always the other bad news that's been on everyone's mind: the freefalling stock market.

"The reality of the economy is not that bad outside manufacturing. But the perception is the sky is falling in part because of the stock market," Wells Fargo's chief economist Sung Won Sohn said. "The stock market is the canary in the coal mine, and the canary is gasping for air."

The tame inflation news came in a Labor Department report that showed the department's Producer Price Index, which measures inflation pressures before they reach store shelves, edged up a tiny 0.1 percent in February. That was even though there are higher prices for natural gas and other energy products.

Without energy and food prices, wholesale prices actually fell by 0.3 percent last month. That's the best showing since August 1993.

But at the nation's factories, mines and utilities, production plunged a hefty 0.6 percent, the fifth straight monthly decline, the Federal Reserve said.

Gas and electric utilities pumped out 2.3 percent less than previously. Manufacturing production declined by 0.4 percent and mining output by 0.5 percent.

Operating capacity, meanwhile, fell to 79.4 percent in February as companies cut back production and shed workers as demand sagged. It was the lowest reading since February 1992.

— The Associated Press contributed to this report

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