Fed Leaves Key Interest Rates Untouched
Aug. 13, 2002 -- The Federal Reserve today kept interest rates steady, as expected, despite ongoing uneasiness about the economy. But the Fed also signaled that it would be willing to lower rates in the future should the nation's economic weakness continue.
The central bank left its key short-term federal funds rate unchanged at 1.75 percent, the lowest level it's been in 40 years, a move that disappointed some on Wall Street.
Indeed, after the Fed's decision, the Dow Jones Industrial Average closed down more than 200 points, despite the Fed's signal that it could lower rates in the future if economic conditions worsen.
The Fed's decision came on the heels of — and to a large extent, overshadowed — President Bush's economic summit in Waco, Texas, where the uncertainty over the economy was a key theme.
In a statement, the Federal Reserve said that weakness in financial markets and heightened uncertainty over the problems in corporate reporting and governance have prolonged the softening of demand that started in the spring.
Even though the Fed said its current interest rate stance should be enough to foster an improving business climate, one of the greatest risks that remains is a further slowing of the economy, which would raise the odds of further rate cuts.
"The risks are weighted mainly toward conditions that may generate economic weakness," said the Fed statement.
Crucial Move
While many economists had not expected the Fed to lower its key interest rate, speculation had heated up in recent weeks that the central bank might lower short-term rates to stabilize what many economists see as a still-weak economy.
But with key rates already at record lows, other analysts correctly maintained the Fed would hold off from further cuts in anticipation of signs of economic recovery. Some economists had even worried that another rate cut would be viewed as a sign of panic by the Fed, causing more harm than good to the economy.
Now the question remains what the central bank will do with interest rates for the rest of the year.
Some, like the economists at Lehman Brothers, believe the Fed will lower interest rates at its next few meetings to stave off a weakening economy. In a recent report, Lehman Brothers economists said they expects the Fed would signal an openness to a series of quarter-point rate cuts this fall that would bring short-term funds rate down to 1.0 percent by year's end.
Still others believe that the current interest rates, which are at 40-year lows, along with improving fundamentals, will keep the Fed on hold for the rest of the year.
"Much of the gloom and doom is behind us and we can look forward to continuous growth," says David Littman, chief economist at Comerica Bank in Detroit. "The Fed will be cognizant of that."
One thing that seems for sure is the central bank will be closely eying economic data in the next few months to gauge the economy's direction, says Joel Naroff, president of Naroff Economic Advisors in Southampton, Pa.
"If job growth begins to pick up and consumers keep spending, then the Fed's not going to be reducing rates any time soon," says Naroff. "But if these things don't keep up and we saw weak job growth or the consumer cuts back, then I think the Fed has said they are prepared to take the necessary action."
President Gets an Earful
Meanwhile, the president wrapped up his economic summit, where he made the rounds among some 240 attendees ranging from corporate chieftains to mom-and-pop investors to discuss ways to jump-start the economy. Shuttling from round table to round table, he got an earful about taxes, red tape and corporate crooks.
At the closing session of the forum, the president said lawmakers have their work to do in order to help the economy. But he also expressed optimism over the future of the American economy.
"We have heard from Americans who are concerned, but not discouraged. We see problems, but we're confident in the long-term health of this economy," Bush said.
Among his closing comments, Bush stressed the need for corporate America to earn back the country's trust and the importance of ensuring the security of Americans' retirement. He also called for an increase in minority home ownership and for Congress to restrain spending.
Bush stressed to one gathering on small investors and retirement security that confidence in corporate America should come from industry policing itself. But he also called for changes that would make it easier to understand what's happening on Wall Street.
"How do we simplify the numbers so that people can understand what they are looking at?" said Bush. "People in this part of the world get a little suspicious of the fine print."
Political Ploy or Policy Posturing?
As Bush and Federal Reserve Chairman Alan Greenspan convened their respective gatherings, financial markets were looking for a much-needed boost. Stocks have been on a downward spiral as mounting corporate scandals and earnings restatements have shaken investors' trust in financial institutions.
Key economic indicators are weak as well. Recently, data on gross domestic product showed a smaller-than-expected 1.1 percent rise in the second quarter, while the first-quarter GDP was revised downward to 5 percent from the previously reported 6.1 percent.
Treasury Secretary Paul O'Neill told ABCNEWS' Good Morning America he expected the U.S. economy to grow at an annual pace of around 3 percent to 3.5 percent by the end of the year.
"It's not atypical for a recovery to go through kind of a saw-tooth pattern and we're in the slow part of the advance but yes, I think we're going to continue to move forward," he said this morning.
ABCNEWS' Ann Compton, Jim Forsyth and Bill Greenwood contributed to this report.