Magazine article Economic Trends

The Economy in Perspective

Magazine article Economic Trends

The Economy in Perspective

Article excerpt

Collateral damage ... At its early-November meeting, the Federal Open Market Committee reduced its federal funds rate target by 50 basis points, to 1.25%. Although it was the FOMC's first action since December 2001, the November decision was the twelfth consecutive rate reduction, cumulating to 525 basis points, since May 2000. Many observers interpret the November decision as the FOMC's acknowledgment that the economic expansion does not seem to be gaining momentum and that another monetary policy action would provide additional support. As recently as April, most analysts expected that the 2001 recession would have ended officially by now, but its presence--or aftermath--remains at the forefront this holiday season. Consumer sentiment about economic conditions has been wobbly, and business executives continue to complain about corporate profits and the poor environment for capital spending. For some of our important trading partners, economic conditions have been worse than our own; this means weak demand from abroad and downward price pressure. Firms are reluctant to hire new employees, and although overall employment levels have been holding fairly steady, the labor force continues to expand. Consequently, the unemployment rate has yet to show signs of cresting--the recent report that the national unemployment rate rose to 6.0% in November was a sharp disappointment. Disappointment seems to lurk at every turn, and patience is wearing thin.

On December 6, the White House announced the resignations of Treasury Secretary Paul O'Neill and National Economic Council head Lawrence Lindsey. A new team of economic policy leaders is expected to be named shortly as the Bush administration places renewed emphasis on communicating its programs and pushing for their enactment. The charged atmosphere makes it likely that economic stimulus will figure prominently in the administration's initiatives, although it has not officially announced the details of its plans.

Last year, Congress enacted legislation that created a wide range of tax reductions for individuals and corporations, some effective immediately and others to be phased in over a 10-year span. One might reasonably expect the administration to phase in some of the already agreed-upon tax measures more rapidly than last year's legislation specified. One might also expect the administration and Congress to pay additional attention to incentives for bolstering capital spending, which has been so much weaker than household spending on housing and durable goods. …

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