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Tuesday, Sep. 29, 1998
Federal Reserve might cut interest rates
Half-point reduction urged to help contain global crisis
Associated Press
WASHINGTON - Federal Reserve policy-makers are expected to cut interest rates for the first time in nearly three years today, acting on Chairman Alan Greenspan's alarm about a deteriorating world economy.
Uncertainties on Wall Street about just how bold the Fed will be held back Monday's gains. The Dow Jones industrial average finished with a gain of 80.07 at 8,108.84, but blue-chips had been up as much as 130 points early in the day.
The question, private economists said Monday, is how much success any cut would have in containing a financial crisis that so far has proven unstoppable and now threatens more countries, including Brazil.
``A Fed rate cut will help undergird a deteriorating global economic situation. But it isn't a magic bullet,'' said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.
Emphasizing the urgency, international authorities were busy working behind the scenes on a rescue package for Brazil. The largest economy in South America is being hit by the same panicked rush to the exits by foreign investors that has already flattened many Asian countries and Russia.
Officials in Washington said discussions were centering on emergency loans of around $30 billion assembled by the International Monetary Fund with contributions from the World Bank, the Inter-American Development Bank and individual countries, including the United States.
Separately, many hope a Fed rate cut would serve as a badly needed confidence booster, demonstrating that U.S. authorities will do whatever is necessary to keep the American economy - the world's largest - growing so it can serve as a market of last resort for other troubled countries.
``A Fed rate cut won't save the world, but it will start a process that will keep the U.S. economy from weakening a lot more - something that would be deadly for the world,'' said Allen Sinai, chief economist at Primark Decision Economics.
Last week, Greenspan said at a congressional hearing that Fed policy-makers understand the need to act quickly ``to prevent the contagion from really spilling over and creating some very significant further difficulties for all of us.''
Those comments were read by some as a signal that the central bank won't stop with the usual quarter-point cut, but will lower rates by a bolder half-point.
``What is needed is more than a symbolic action of a quarter point,'' former Labor Secretary Robert Reich said Monday. He urged at least a half-point cut as a ``pre-emptive strike'' against the threat of global deflation, something the world hasn't seen since the Great Depression of the 1930s.
The Fed last cut rates on Jan. 31, 1996, the final in a series of three quarter-point moves to stimulate domestic demand and keep the U.S. economy out of recession.
The federal funds rate, which is used by commercial banks as a benchmark to determine the interest charges paid by millions of consumers and businesses on short-term debt, was last changed on March 25, 1997, when it was raised a quarter-point to 5.5 percent because of inflation worries.
While expressing relief that Greenspan has been able to marshal a Fed majority for rate cuts, analysts still worry about the sizable number of dangers that could yet rock global markets.
Any collapse in Brazil would affect the rest of Latin America, a region that buys nearly 20 percent of U.S. exports. In addition, there are still major worries about how fast Japan will be able to deal with nearly $1 trillion in bad bank debt and its worst recession in 50 years.
If Japan doesn't resume growth and serve as a market for its troubled Asian neighbors, the Clinton administration believes other Asian nations will be unable to pull out of their own steep downturns.
And then there is China. Will slumping foreign sales put so much pressure on its export-driven economy that Chinese officials renege on their pledge not to devalue their currency, a move that would further hurt recovery efforts in Asia?
Treasury Secretary Robert Rubin, meeting with China's foreign minister on Monday, called China's forceful commitment to its currency ``right for China and also very good for the rest of the world.''
Even if economists' worst nightmares don't come to pass, they insist the world is in for a prolonged period of weak growth.
``What started in Thailand has now spread much more widely and that makes it much more difficult to turn things around,'' says Jeffrey Shafer, the Treasury official who helped mastermind the Mexican peso rescue effort in 1995. ``But all is not bleak. You have a series of actors who, if they do their part, will be able to build the structure for a global recovery.''Post your comments about local news eventsFront Page || Main Index || News || Business || Texas || South Texas Outdoors || Birdwatching || Sports || Entertainment || Selena || Education || South Texas Attractions || World Wide Web