One More — Now Into the Breach

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On Wall Street they call it "looking across the valley." Everybody knows we're in a recession, everybody knows we're at the bottom, or near it, or maybe even just past it. What nobody knows is how much longer the hike is, and what's the lay of the land on the other side. See, most Wall Street coinage of this sort — remember "visibility," the summer's hot term? — is a euphemism meant to make you sound like a squinty-eyed explorer, gazing at distant horizons only you can see, when really you're not even sure where you are or whether you'll ever sleep on clean sheets again.

Alan Greenspan's valley is easier to define — it's the seven weeks between Tuesday's last-of-the-year FOMC meeting and January 29-30, the first meeting of 2002 and the next time Greenspan can do something about short-term interest rates (without scaring everybody with a between-the-meetings emergency). He doesn't know much better than anyone else where the downhill part ends and the uphill part begins, or how steep a re-expansion that uphill part will be. So he did what absolutely everybody expected — he sent the economy into the breach with a hot lunch and a pat on the back. And a shrug.

[an error occurred while processing this directive] The hot lunch was the 25 basis-point cut the FOMC delivered Tuesday at 2:15 p.m. sharp — another quarter-point that makes it a record-breaking 11 cuts for 4.75 percentage points on the year. The Fed's short-term target now stands at 1.75 percent, the lowest it's been in 40 years, and those who get a lift from still-cheaper money — theoretically, borrowers, lenders, investors, homeowners and just about everybody who could use some extra cash — get another 25 points to throw on the fire this winter.

The pat on the back, of course, was the 25 points he didn't cut, the slowing down of the rate-cut regime to 25 points a pop from 50, which is a signal that Greenspan suspects the recession may have at least bottomed out, the icy economic weather won't last all year, and the Fed's work as a preventative medicine man may be done.

The shrug was in the statement, which was less sure of itself — and thus more realistic — than the usual Greenspan hedge-emony:

"To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative' Economic activity remains soft, with underlying inflation likely to edge lower'" And then the punchline: "The Committee continues to believe that of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

In other words, the Fed is still standing by, still watching — and still playing it close to the vest in case any pessimists out there need at least the possibility of another cut. (After the announcement, the Chicago bond slingers immediately priced in another quarter-pointer for Jan. 30. Just so you know.)

Wall Street, having expected exactly what the Fed delivered, was up before 2:15 p.m. and rose a bit more on the announcement Tuesday before turning listless and closing a bit to the downside on some bad earnings news from Merck. This is a market whose most interest-rate-sensitive sectors have already run up even farther than the wider market since Sept. 21, and to whom Tuesday's 11th cut was decidedly not a surprise. The market may get a marginal boost from the nice warm feeling of a Washington stimulus package — word of a brewing deal Tuesday morning helped the pre-Fed trading — but Wall Street's winter will be determined by fourth-quarter-earnings pre-announcements and the daily thrum of economics reports that will have to reach a good-news consensus soon if the rally is going to avoid a major breather.

And the economy? Well, a few economists — Ian Shepherdson of High-Frequency Economics and Ed Hyman at ISI Group Inc., if you're keeping tabs — tell the Wall Street Journal the recession has already bottomed. Consumer spending, even among the unemployed, will be stronger than we think, they say — and though the recovery will be indeed be slow, it may have already begun. The National Association of Purchasing Managers, on the other hand — these are the people who are responsible for that all-important rebound in capital spending we're waiting for — reported the results of their 62nd semiannual survey Tuesday, and their schedule doesn't have much of a recovery arriving until at least the second half of next year.

Greenspan, after 11 cuts, has sent the economy into the valley with not only a meal but a warm winter coat, a scarf and a flu shot. But he doesn't make the economic weather — to a much larger extent, consumers do. And so the contours of the valley, while we're in it, is likely to be determined by how much money they have socked away. What they think about the chances of hanging onto their job long enough to even be working in the second half of 2002. Whether those pre- and post-Christmas sales are an incentive or an insult.

By the time the Fed meets again at the end of January, we'll know how well we survived the frost.