Federal Reserve Chairman Alan Greenspan yesterday announced a 0.5-point cut in the Federal Funds rate, lowering the rate to 5 percent after a 5-0 vote by the Federal Reserve Board.
The rate cut had been subject to intense speculation in recent weeks amid fears of a looming recession and faltering stock prices.
The lowered interest rates will allow consumers and investors to access funds less expensively, encouraging spending and investment. In lowering rates, the Fed hopes to restore momentum to a slowing economy.
“The incentive to invest in new or updated capacity is weak now,” explained University economics professor Saul Hymans. “The Fed wants to lower the cost of doing that to keep it from falling more rapidly.”
In addition to domestic issues, the Fed warned of the potential impact of foreign economies on the economic outlook.
“The potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft,” the Federal Reserve Board explained in its announcement.
Many analysts and investors had anticipated a larger cut after a particularly dismal week in the stock market and the announcement was met with disappointment on Wall Street. The Dow Jones Industrial, Standard & Poor 500 and NASDAQ indexes all closed down after the Fed”s announcement.
Other analysts noted that a larger cut, which would have been Greenspan”s largest ever, could have harmed the economy by signaling a lack of confidence at the Federal Reserve.
Recent forecasts for the economy have, in fact, been far from dismal. University economists at the Research Seminar in Quantitative Economics released a report late last week refuting predictions of a coming recession.
“The economy isn”t nearly as weak as the news hype implies,” Hymans said of the report, which predicted a 2.9 percent rate of growth in the second half of the year.
Although the report warned of future rises in unemployment, real disposable income was predicted to increase 3.0 percent in 2001, and researchers noted the “small, positive impact on economic growth” that President Bush”s tax cut could offer.
In the mean time, the Federal Reserve will make economic growth and recovery its primary concern. In the announcement, Greenspan made clear that the Board will continue monitoring economic indexes, suggesting the possibility of further cuts in the near future.