Fed acts, but a dip still looms
Its rate cuts haven't been aggressive enough to boost the economy, say some analysts.
The US economy is now slowing so quickly some economists believe it is close to a negative growth rate – and perhaps the forerunner to a recession.
This sudden downshift in America's economic fortunes is one reason the Federal Reserve has dropped interest rates at its last three meetings – including a quarter point drop Tuesday. However, a growing chorus of economists believe the rate reduction may be a case of too little, too late.
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively."
In its statement on Tuesday, the Fed acknowledged the economy "is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending." However, Mr.
Zandi says the central bankers should have gone further. "They are misjudging the risks," he says. "The fragility of the financial system is the key risk."
Yesterday, the Federal Reserve signaled it was acting more aggressively to address problems in the financial sector. It announced it was coordinating with the European Central Bank, the Bank of Canada, and the Swiss Central Bank to provide additional liquidity for commercial banks. The Fed's actions helped to rally the stock market, which recovered most of its losses from the prior day when investors were disappointed with the Fed's quarter-point interest rate cut.
"This is positive news," says Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. "It helps solve some liquidity problems, not just in the US but globally."