Federal Reserve chairman Alan Greenspan arrives at his office
At 2:15 p.m. ET Tuesday, the Fed did exactly what everyone expected and cut the short-term interest rate another 50 basis points (half-percent) to an even 4 percent — a seven-year low — and kept its bias pointed toward further easing. That's five separate 50-point cuts since the start of the year and by far the most aggressive easing in Greenspan's 14-year tenure.
The markets just burped — a 50-pointer was already priced in — but it was a reasonably satisfied sound (although bond markets are still hungry). The corporate half of the economy, unlike the still-spending consumer half, is still in deep shell-shocked, cost-cutting mode, and nothing guarantees a turnaround (sooner or later) quite like a Fed fighting off a recession with all the guns in its armory. Heck, in this CNBC-watching age, even Main Street brightens a bit when the Fed's on the offensive.
On the other hand, should it worry anybody that after five cuts — three on the meeting days, two in between — Greenspan is still slashing?
The risks, the statement went, are "weighted mainly toward... economic weakness." And there was more:
"The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward.
"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy."
In other words, not much has changed since Father Greenback swooped in with his last 50-point slice April 18. Economic reports are still confoundingly mixed. Businesses are still cowering in their caves — writing off excess inventory, cutting production and laying off workers — and no real turnaround is gonna happen until the corporate world decides to get back in the game. Consumers, incredibly, are still spending, although some measures — like car and truck sales — have begun to weaken. And while measures of consumer sentiment have come off their lows, they're still pretty low — down some 15 percent since December.
Meanwhile, unemployment is still on a steady rise, notching two consecutive months of new job losses for only the 12th time since 1950. Consumers may be able to ignore a sagging portfolio, but who among us will spend without a paycheck? And then there's the energy crunch — especially gas prices, which have already spiked ahead of Memorial Day and may or may not get worse when summer hits.
A 25-point cut from the Fed on Tuesday might have upset Wall Street for a day or two, but it also would have been a message from Greenspan — at the very least a smart guy whose job it is to know at least as much about the economic state of things as anybody else — that things were beginning to look up.
So much for that.
So where does the Fed go from here? According to the Fed's statement, it doesn't see much reason to think about stopping. Business investment is still slipping, consumers are still losing their jobs, and while the Fed is arguably fighting an immediate problem with long-term solutions — you've heard the one about interest-rate cuts taking 6-18 months to seep into the economy — the heat is too strong on Greenspan for him to ease up on the throttle now.
For businesses, Fed cuts do mean debt-servicing savings and cheaper money, and a company that's looking forward to having a few extra bucks around soon is that much closer to actually spending them. And consumers like a lower interest rate as much as anybody. As long as inflationary pressures are contained — and the Fed says they are — and the danger of a slippery recessionary slope still remains, there's no real reason for a central bank to take a chance on its having done enough.
Five cuts in five months, of fifty basis points each. This isn't Japan — a liquidity injection like that has to have a salutary effect sometime — and the Fed has a good historical record of eventually winning a battle like this.
But when? But that ol' business cycle isn't called the business cycle for nothing, and businesses haven't had a boom-and-bust corporate hangover like this in, what — 75 years? Cut by cut, Greenspan is trying to prod them back onto the corporate-investment horse — or at least to lay off the layoffs a little — and hoping that in the meantime, consumers will find a way to get us from the front end of those 6-18 months to the back.
But Tuesday, you heard it from the Man's own lips: This is far from over.