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Monday, March 17, 2003

Business Week and The Fed Funds Rate

Business Week thinks the Fed will hold fire this week and maintain rates unchanged: I think they are probably right, but you never know. As I said last week, this one is a game of poker.

Ever since the idea of a New Economy dawned in the mid '90s, Alan Greenspan's adherence to its nostrums has made him the undisputed ruler of the roost at the Federal Reserve. Sure, as chairman of the central bank he has always been the first among equals, especially when it comes to setting monetary policy. But his willingness to throw many time-honored economic theories aside in the belief that the U.S. was entering a new era of productivity-powered growth, helped cement his position as policymaker nonpareil.

Now, though, as the U.S. struggles to recover from the excesses of the bubble economy of the late '90s, other Fed officials have been emboldened to question Greenspan's grasp on the interest rate reins. In the runup to the Tuesday, Mar. 18, meeting of the Fed's Open Markets Committee (FOMC), Greenspan has tried to downplay the need for further rate cuts, arguing that the economy's recent weakness is mainly a case of Iraq-induced geopolitical jitters that'll clear up once the war is won.

Other monetary mandarins aren't so sure. They fear that the economy is still fighting the fallout from the boom years, with companies saddled with too much capacity and consumers burdened by too much debt. And they think another rate cut is needed to keep the economy moving ahead (see BW Online, 3/14/03, "One More Cut, Please, Mr. Greenspan").

The likely result from Tuesday's powwow? A compromise. In deference to Greenspan, the Fed will probably hold off from cutting rates immediately. But it will also make clear in a statement that it's ready to act promptly to ease policy should that prove necessary after the U.S. launches its long-awaited attack on Iraq. "Policymakers likely will change their risk assessment toward economic weakness and probably will announce that they'll closely monitor economic and financial conditions," says Richard Berner, chief U.S. economist for Wall Street broker Morgan Stanley. "That's Fedspeak for saying another easing move could come at any time."
Source: Business Week

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