-Caveat Lector- <http://www.nytimes.com/2001/01/04/opinion/04THU1.html> EDITORIAL January 4, 2001 The Fed Moves First The juxtaposition of economic activities yesterday was striking. In Austin, Tex., a hand-picked bunch of corporate chief executives sat around with President-elect George W. Bush discussing the need for tax cuts and interest rate reductions. But while they talked, Alan Greenspan and the Federal Reserve in Washington took bold and carefully calibrated action to stimulate the economy. The Fed's decision to cut a key short-term interest rate, timed to counteract a recent plunge in consumer confidence and poor earnings reports, provided powerful evidence that the nimble Fed can do far more to combat the economic slowdown through monetary policy than the incoming Bush administration can hope to achieve through its enormous proposed tax cut. Mr. Bush tried gamely yesterday to argue that the Fed's recognition that the economy is in trouble actually underscored the need to go ahead with his tax cut as well. But that rationale seemed increasingly dubious given that the proposed 10-year, $1.3 trillion tax cut � actually $1.9 trillion, when interest costs are factored into the estimate � with cuts backloaded to the later years, would not take hold for quite some time, perhaps well after any stimulus is needed. The Federal Reserve rarely changes interest rates between official meetings of its policy committee, and even when it does it rarely moves rates by more than a quarter of a percentage point. That is why the Fed's decision yesterday, several weeks before its next meeting, to cut rates by half a percentage point rocked financial markets and sent the Dow up more than 300 points within minutes of the announcement. The dramatic move told investors that the Fed recognized that it had clamped down too hard when the economy was roaring along at close to a 6 percent rate of growth at the beginning of last year, and that the Fed wanted the public to know now that it was committed to keeping the economy from slipping into recession. The Fed's move is a welcome inoculation against economic deterioration that becomes more visible with each day's release of the latest indicators. The economy grew during the summer at less than half the rate of the winter and spring. Claims for unemployment insurance have risen to some of the highest levels in four years. A major index of manufacturing activity has fallen to its lowest level in 10 years, and some of the nation's biggest retailers are announcing disappointing sales figures. The Fed wisely decided to strike before slower growth slides into actual contraction. The Fed's only reason for hesitating might have been fear of making inflation worse. But outside of the energy sector, prices are tame and pose no serious threat of taking off. Despite yesterday's surprising action, the economy will not turn around quickly. Ordinarily it takes at least six months for rate cuts to filter through the economy, cutting borrowing costs and making more loans available for families to buy more consumer goods and businesses to invest more in new equipment and structures. Rising employment and incomes follow. In addition to its economic impact, the Fed's action also carried, intentionally or not, a potent political signal. Clearly, Mr. Greenspan wanted to get out ahead of Mr. Bush's argument that Congress needs to pass a big tax cut, aimed overwhelmingly at upper-income families, to ward off recession. There is a valid role for tax cuts at a time of large budget surpluses, especially if they are tailored for an important purpose � for example, helping low- income families buy health insurance. But unless an economic downturn is prolonged, the impacts of tax cuts are very hard to time. By the time cuts are proposed by an administration and passed by Congress, they can easily wind up stimulating an economy that has already pulled itself out of the doldrums and is speeding along. Such tax cuts might actually overheat the economy, making the Fed's task of keeping the economy on an even keel even harder. ================================================================= Kadosh, Kadosh, Kadosh, YHVH, TZEVAOT FROM THE DESK OF: *Michael Spitzer* <[EMAIL PROTECTED]> ~~~~~~~~~~~~~~~ The Best Way To Destroy Enemies Is To Change Them To Friends ================================================================= <A HREF="http://www.ctrl.org/">www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! 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