Loosen Monetary Reins

THE Fed met to mull over The money supply's next maneuver. It looked at the ``Ms,''and other big trends, While business sank further and further.

Pardon the doggerel. It was inspired, if that's the right word, by the economic situation in the United States. The Bush administration and Congress agreed last Sunday on a package of tax increases and spending cuts that holds promise of reducing the deficit substantially - if not this fiscal year, then over the next several. The stock and bond markets were impressed initially by the agreement, with prices rising nicely Monday, though jitteriness set back in. A drop in oil prices probably also had something to do with that surge in optimism.

The markets will be even more impressed if the Federal Reserve policymakers are persuaded by the package to lower short-term interest rates. Chairman Alan Greenspan has hinted that the Fed would ease credit to offset any restraint imposed by trims in the deficit. Indeed, one newspaper report said the Fed's policymaking Open Market Committee (FOMC) authorized such action at its meeting last month. If true, Mr. Greenspan did not grasp this option, presumably wanting to put pressure on the budget negotiators.

On Tuesday the FOMC met again. The group of seven governors and the five voting presidents of regional Fed banks undoubtedly considered whether to lower interest rates right away or to wait until Congress approves the accord, thereby putting pressure on the representatives and senators to act quickly. As usual, the FOMC will make no public announcement of its decisions until the release of its minutes several weeks from now. But the markets will be watching for a modest decline in what is known as the federal funds rate - the interest that banks charge on overnight loans to one another - to discern the Fed's decision.

We think the Fed should move immediately. Business activity is so slow that today a pessimistic economist could be defined as one believing we are already in a recession, while the optimist thinks a recession will not occur until sometime next year. There is a lag of at least six months between monetary easing and its impact on the economy. So even quick action may not save the nation from an economic slump. Unemployment numbers to be released today could demonstrate again the need for loosening.

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