The Fed's Final Cut?

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You're Alan Greenspan. You've cut short-term interest rates a record-tying 10 times this year — eight of them half-pointers — and 3 times since Sept. 11, slashing the fed funds target from 6.5 percent to 2 percent, which if there was any inflation would mean you were giving the money away. The cuts haven't helped appreciably — everywhere you look there's another article wondering whatever happened to your "magic wand" — but nobody cares to imagine what Sept. 11 might have done to the already-ailing economy if you hadn't been pumping liquidity into it all this time. Because however bad this recession feels to that 5.7 percent of us who spent November without a job, it could be a lot worse.

Now, it's the last FOMC meeting of the year Tuesday, two months to the day after the planes hit, and the prognosis is good. Consumer spending has roared back and consumer confidence is picking up. Energy prices are still low. Housing is still strong. Inflation is still distant. And there's general agreement that the manufacturing sector, after leading us all down into these dumps by turning out way too much stuff for way too many doomed dot-coms, is now ready to lead us back up sometime this winter.

Half-full or half-empty?

Still, something's not quite right. The stock markets have been on a tear since they hit bottom Sept. 21, with the Dow racing up a bullish 20 percent and the NASDAQ a bubble-icious 40 percent even though worries over anthrax and Afghanistan, Argentina and Enron. Not to mention that investors seem to have forgotten all about what is clinically known as the "event-risk premium" the fact that those appearances by Tom Ridge mean terrorism may well strike the U.S. again before this whole thing is over.

Then there's the half-empty crowd, which has some good points. Consumer spending numbers were pumped up by interest-free car deals that can't last. Spiking factory-order numbers are being inflated by defense spending, not an area known for sharing its economic wealth. This recession is different from the others, they say — it was led by bubble-shocked businesses, not weary consumers, and so what happens when spring comes and consumers are out of money? Those scary monthly unemployment numbers — which will rise into the spring (at least) whether recovery happens or not — aren't going to help.

Recovery around the corner

The recovery is coming — nobody argues about that. The question is what kind of recovery it will be, and Wall Street may be setting itself up for a big fall if it thinks corporate profits will be as good as 1999 anytime soon. And a big fall on Wall Street, in times like this, is going to depress everybody. We might get positive GDP growth in the first quarter of next year — we might even be having it right now — but the climb from 1 percent to 2 percent to, eventually, 3 percent is going to long and slow — and the unemployment number that took another big step up Friday will keep rising the whole time as companies try to keep profits up by keeping labor costs down.

But the recovery is coming, and it may be time for Greenspan to sign off on that certainty. He's not any more sure about when and how fast than anybody else, but he knows it's coming, and he's also gotta know that with the fed funds rate at 2 percent, there's not a heck of a lot more he can do. He knows that with the recovery coming at the same time Washington is falling in love with deficit spending again, the bond markets are going to be pushing up long-term rates anyway. If he doesn't ease off on the gas soon, he's going to add late-2002 inflation to the bond-slingers' list of worries.

Besides, cutting another half-point sends the incremental message that nothing much has changed for the economy's prospects since Sept. 11, since June, since January. Unless he spelled out in the statement that this one's definitely the last — and he's smarter than that — he'd be ruining everyone's Christmas by admitting he still can't see the light at the end of the winter. Not cutting at all, on the other hand, might be a bit premature. It'd be an undeniable sign of optimism, which the markets would probably agree with, but it'd be one he might regret if this comeback happens as slowly and creakily as a lot of people suspect.

Now a quarter-point cut — that'd be just right. "The recovery is coming," goes the subtext, "but it could take a while to get going, so we're hedging our bets." Throw in a statement about being more worried about recession than inflation — it shows vigilance and the possibility of another cut next year if it's needed, which is all the pessimists can ask for — and you've got the perfect combination of stimulus and caution.

Greenspan, remember, is a man nearing the end of his career as the most famous Fed chairman in history, once considered infallible by Washington and Wall Street alike and looking to be remembered as one of the economic heroes of America's most trying times. The tarnish that's on him these days is there because of the two times he let the business cycle take him for a ride — the infamous half-point hike in May 2000, which kicked the new-economy bubble after it had already burst, and the half-point cut in January, which history says was a few months too late.

Hey — he's just a Fed chairman, and this increasingly violent business cycle of ours has made fools of a lot of smart guys. But Tuesday looks like the moment when Greenspan is going to rediscover the quarter-point cut as a way to not only turn off the panic light but to restore the impression that he's in control again, and he's got his old gradualist touch.

Anyway, that's what I'd do.