Are lower rates in the horizon?
Business and Consumers might need another kick
October 20, 2002

As I sit here watching the network news on a Sunday afternoon and contemplating how to spend the last few hours of freedom before going back to my cubicle for another week, I see a news story about how many people have been laid-off. The anchorwoman started reading from a long list 25,000 gone from Boeing , 5,000 laid-off from Delta and so on. Frankly it is a little depressing. Nevertheless, I am an optimist most of the time and the news that the economy is still growing at 3% and that the unemployment rate is still under 6% are things that make me believe that things are not as tough as people think they are.

On the other hand, I am a big believer in perception and markets overreacting to bad news. It seems to me like consumer and businesses have lost some confidence and that we are going to have a bad holiday season as consumer and wholesale purchases are going to go into the tank.

Monetary Policymaking to the rescue?

It is not clear to me if further decreases in the fed funds rate will do any good. After all, the target rate is already a low 1.75%. However, it seems likely that the fed will drop the rates once more to encourage economic activity.

Intended federal funds rate

Changes during the last two years

Change in basis points
Date	Increase	Decrease	Level (percent)
2001
December 11	...	25	1.75
November 6	...	50	2.00
October 2	...	50	2.50
September 17	...	50	3.00
August 21	...	25	3.50
June 27	...	25	3.75
May 15	...	50	4.00
April 18	...	50	4.50
March 20	...	50	5.00
January 31	...	50	5.50
January 3	...	50	6.00
2000
May 16	50	...	6.50
March 21	25	...	6.00
February 2	25	...	5.75

A basis point is 1/100 percentage point.

On September 24, 2002, The Federal Open Market Committee decided to keep its target for the federal funds rate unchanged at 1 3/4 percent. The biggest news on that day was that two of the members of the committee voted against it and wanted a reduction. The next meeting is November 6, 2002. Personally, I hope they lower it another 50 basis points. Cheap money is always good.

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