With the US economy rapidly running out of steam, pressure is mounting on Federal Reserve Chairman Alan Greenspan to reduce interest rates next year, a move that could be complicated by President-elect George W. Bush's insistence on big tax cuts.
By all accounts the pace of the near 10-year US expansion is flagging fast as consumers spend less and businesses, burdened by tight credit conditions and rising energy costs, try to work off inventories of unsold goods.
After averaging 5.2 percent in the first six months of the year, US economic growth throttled back to 2.7 percent in the third quarter and according to some predictions could be slower still in the fourth.
For 2001, analysts generally see gross domestic product expanding at an annual rate limited to around three percent.
The downturn has shaken an already wobbly stock market. In recent weeks some of the country's most formidable corporate titans — notably Microsoft, Eastman Kodak, Ford Motor Company and Chase Manhattan — have warned that their quarterly results will come in below expectations.
Bush in recent days has taken to sounding the alarm, making it plain that while the expansion may have been nurtured under President Bill Clinton and the Democrats, it is also coming to an end on their watch.
"Our economy is showing warning signs of a possible slowdown," Bush said Wednesday, December 20, as he introduced his new Treasury Secretary, Paul O'Neill.
Explaining what he planned to do about it, the Texas governor replied: "We are going to play the hand we've been dealt."
What he has in mind is a $1.3 trillion across-the-board tax cut over 10 years, financed by a federal budget surplus expected to total $4.2 trillion through 2010.
Bush describes the plan as an "insurance policy" to help consumers and businesses cope with the downturn.
"The current economic slowdown fits in quite well with the need for tax cuts," said John Lonski, chief economist at Moody's investors' service.
But other analysts argue that a tax cut in an economy still harboring considerable growth potential could be inflationary and could actually induce the Federal Reserve, the US central bank, not to lower interest rates.
The plan is likewise certain to encounter stiff opposition in Congress, where Bush's Republicans hold but slim majorities.
"I don't know a Democrat who supports the $1.3 trillion in tax cuts," said Senate Minority Leader Ton Daschle, who nonetheless added that "there is plenty of room for compromise" and for less ambitious reductions.
In addition Greenspan himself opposes committing so much of the surplus to tax relief, preferring instead to use the money to pay down the federal debt and thereby ease pressure on interest rates.
The Federal Reserve on Tuesday signaled its conviction that weakening growth now poses a greater risk to the country than inflation, a shift in position widely interpreted as heralding an actual rate cut in the new year.
"The Fed won't just sit around, watching the economy slow," predicted Merrill Lynch chief economist Bruce Steinberg.
"We now look for the Fed to begin easing policy next month and expect the Fed to ease by 100 basis points (one percentage point) by the end of next summer."
That would pare back the benchmark federal funds rate, a target used by banks making overnight loans among themselves, to 5.5 percent. The next meeting of the Federal Reserve's policy-setting Open Market Committee is set for January 30-31.
According to Barclays Capital economist Henry Willmore, the committee's shift on Tuesday could be seen in Congress as "ratifying the Bush team's concerns about a slowing economy."
"An ease or series of eases by the Fed in the first half of next year would probably influence certain members of Congress who are currently undecided by Bush's tax cuts."— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)
