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