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| Federal Reserve Chairman Ben Bernanke Jim Young/Reuters/file |
Fed acts, but a dip still looms
Its rate cuts haven't been aggressive enough to boost the economy, say some analysts.
By Ron Scherer | Staff writer of The Christian Science Monitorfrom the December 13, 2007 edition
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New York - The US economy is now slowing so quickly some economists believe it is close to a negative growth rate – and perhaps the forerunner to a recession.
This sudden downshift in America's economic fortunes is one reason the Federal Reserve has dropped interest rates at its last three meetings – including a quarter point drop Tuesday. However, a growing chorus of economists believe the rate reduction may be a case of too little, too late.
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively."
In its statement on Tuesday, the Fed acknowledged the economy "is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending." However, Mr.
Zandi says the central bankers should have gone further. "They are misjudging the risks," he says. "The fragility of the financial system is the key risk."
Yesterday, the Federal Reserve signaled it was acting more aggressively to address problems in the financial sector. It announced it was coordinating with the European Central Bank, the Bank of Canada, and the Swiss Central Bank to provide additional liquidity for commercial banks. The Fed's actions helped to rally the stock market, which recovered most of its losses from the prior day when investors were disappointed with the Fed's quarter-point interest rate cut.
"This is positive news," says Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. "It helps solve some liquidity problems, not just in the US but globally."
The new action will allow commercial banks to bid for funds that are placed in a special "auction" facility. This means banks having trouble raising money in the financial markets may obtain funds. The borrowers from the new facility will be anonymous, a key feature for the banks since it will help them avoid the stigma of borrowing.
The financial markets have not yet recovered from their meltdown this past August when banks started to detail their loan losses on sub-prime mortgages. Since then, banks have reported multi-billion losses and become more reluctant to lend money despite interest rate reductions by the Fed. There are some reports that the Fed may act within days to try to ease credit conditions.
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