Fed's Rate Cut Could Well Be a Wednesday Whopper

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Federal Reserve Board chairman Alan Greenspan appears before the Senate

The stakes just got higher for Alan Greenspan, and the rate cut might have just gotten deeper.

With the Federal Open Market Committee in the first day of a two-day interest-rate meeting to consider the sagging state of the U.S. economy, the Conference Board reported Tuesday what's on consumers' minds in January — and what they think of the future. In a word: gloom.

This month, "consumer confidence" is an oxymoron

The board's consumer-confidence index continued its sharp slide to 114.4 in January, compared with 128.6 the previous month. The index has lost more than 28 points since September and is now at its lowest level since December 1996. And the expectations index, measuring what the survey's 5,000 families see coming in the next six months, was downright apocalyptic, plummeting to 77 in January from 96.9 the prior month, and is now at its lowest level since October 1993. People see fewer jobs, lower investment profits, and less reason to buy anything.

Conference Board director of consumer research Lynn Franco said what was on everyone's lips on the Street when the news hit: The expectations index is now in "territory normally seen prior to a recession." Translation: When layoffs, cutbacks, slowing growth and the r-word start to imprint themselves on the public mind, folks stop spending, and dread quickly becomes reality. (The last such sharp drop in the index? Right before the 1990 recession.)

The Greenspan confidence index

For the Fed action due out Wednesday, it means that Greenspan and his colleagues have to cut short-term interest rates that much further to stay ahead of the curve. In a week, the markets have gone from "quarter-point, maybe a half-point" expectations to "definitely a half-point," and behaved accordingly. A quarter-point cut would now be an absolute disaster on the Street, a half-point will make little more than a ripple.

Yep, you heard it here: 75 basis points (three quarters of a point) is what the Fed needs to put a smile on the face of the bond markets and the real economic bears, and it increasingly looks as if Greenspan is one of them. The Fed chairman went out of his way to declare during his Senate testimony last week that economic growth was "close to zero," and the board's consensus may well be that we're in a recession right now.

The "fabric" is clearly tearing

During that testimony, Greenspan also called "critical" the question of whether a slowdown would "breach the fabric of consumer confidence," and he doesn't need much more evidence than this that it has. He's already made his mea culpa for last May's half-point hike with the surprise half-point cut the first week in January; now it's time to make sure a precipitous slowdown — and an accordingly precipitous drop in mood on Wall Street and Main Street alike — takes on a "V" shape in a hurry.

The soft landing is a distant memory. Now Greenspan is looking for a hard bounce-back, and that takes not only cheaper money but good psychology. And with the economy — two thirds of which is in consumers' trembling hands — not only screeching to a halt but starting to spew smoke from under the hood, three quarters of a point looks like the only shot in the arm in Dr. Greenspan's medicine cabinet.

He can always take it back in the spring.