Economy Ignores Fed's Lowering of Interest Rates Tight Lending Requirements by Wary Banks, Low Consumer Confidence Impede Borrowing

Article excerpt

THE Federal Reserve Board, broadly perceived as the only government shop with the tools to direct United States economic policy, may not be up to the job.

It's not for lack of trying. The Fed has reduced interest rates four times since last December, including last week's decision by Federal Reserve Board chairman Alan Greenspan to ease rates again.

Now at 5 percent, the Fed's discount rate - the interest rate it charges when commercial banks borrow from the central bank - is at its lowest level since 1973. The federal funds rate, the overnight lending rate banks charge each other, was cut to 5.25 percent.

But lower rates have failed to spur the kind of economic activity necessary to push the US economy out of recession.

Sen. Donald Riegle Jr. (D) of Michigan, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, blasts the Fed for action "that is long overdue," and "not good enough." He calls on commercial banks to follow-up on the Fed's action by lowering their prime lending rates to consumers.

Lower rates alone will not lead to economic recovery, says the Michigan senator, especially for Americans out of work. Unemployment in his state, home of the ailing US auto industry, is 9 percent.

Lower consumer confidence about the present and future has kept brakes on consumer spending, which accounts for two-thirds of US economic activity.

Banks, almost unwilling creditors due to huge loan losses, are far more restrictive in their personal and corporate loans.

Marco Babic, a senior financial analyst with Evans Economics, a Washington-based forecasting and advisory service, says the future overall credit picture does not look bright. Consumers will continue to exercise the same caution they have for the past 12 months, as long as unemployment continues to hover around 7 percent.

Consumers' reluctance to spend means they can save more and borrow more, Mr. Babic says. "They may buy more expensive, higher-quality products, which will increase US production." Stocks kept lean

Businesses have kept their stocks lean during the past year of recession.

"They have largely worked off their inventories, so any increase in demand will mean more production. But I don't see any raging recovery," says Babic.

Fed-watcher Christopher Whalen, a financial consultant with the Washington-based Whalen Company, says: "Banks and people alike aren't selling anything. Whether it's a white-collar employee who's living off his savings or a medium-sized business saddled with debt and unable to expand, the economy's going to be flat for a long time."

A primary reason, says Mr. Whalen, is that banks don't have capital. …

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