Fed Cuts Interest Rates Again
May 15, 2001
The Fed cut credit costs another half percent today - the fifth cut this size since January. No immediate benefit is expected for equipment manufacturers or freight haulers, but it should help boost spending in the economy later this year.
So far, consumer spending continues to grow slowly while business investment is stalled with a possible decline ahead. A recession has always accompanied a sustained fall in business investment.
The game plan appears to be to prop up the consumer and construction sectors enough to provide cover for the capital equipment makers to work off their surplus inventory without having to make further substantial production cuts. The Fed believes that the capital equipment manufacturers, especially the high tech manufacturers, were the key driving force in the strong economic growth through last summer. Their products were the source of the surge in productivity growth that boosted consumer incomes sharply.
So these companies will get what they need to avoid cutbacks in their capacity, their research and their own investment. What they need now is a few months of steady demand for their products so they can balance their inventories.
(There will be plenty of time for blame later, but it is clear that the electronics companies created most of their own problems with unrealistically high demand forecasts that led to massive inventory overstocking.)
The process works like this. Lower credit costs spur a few more new home purchases, remodeling projects and car or truck trade-ins. In turn, these manufacturers buy a little bit more equipment and materials and trim their layoff plans. Also, mortgage refinancing will have another surge. Most refinancings result in "cash out" used to make other purchases. This "cash out" has been the major source of big ticket consumer spending so far this year.
The Fed's determination to prevent a capital equipment recession will bring another interest rate cut at the end of June if equipment manufacturers still cannot see enough demand in the pipeline to maintain production levels.