SAVED BY ZERO

Alan Greenspan's Balancing Act (DAVID LEONHARDT, 6/10/03, NY Times)

By signaling that he is prepared to cut interest rates once again, Alan Greenspan has entered what many analysts consider to be dangerous territory in one of the most difficult battles he has fought as chairman of the Federal Reserve.

Mr. Greenspan has used his rhetorical power in recent weeks to full effect, saying that he was inclined to take out "insurance" against a new downturn
and the prospect of a sustained fall in prices, known as deflation. This hint of another cut in the short-term rate that the Fed controls has helped drive down long-term rates in the financial markets and reduced the cost of buying houses, factory equipment and many other engines of economic growth.

Before this month ends, however, Mr. Greenspan will have to switch from words to action, and he faces a dilemma in doing so.

If the Fed does reduce short-term rates--it would be the 13th cut since the start of 2001--they will fall to the lowest level since the 1950's. Rates would then be near a point where the $1 trillion money market industry had almost no room to earn profits, potentially disrupting financial markets and making it harder for some companies to borrow.

But if the Fed stands pat, it will do what Mr. Greenspan usually takes great strides to avoid doing: surprise the market. Mortgage and other interest rates would probably jump, and with the European Central Bank having cut its benchmark rate last Thursday by half a percentage point, the exchange value of the dollar might rebound somewhat, hurting American manufacturers that compete against foreign companies.

Wouldn't it be helpful to drive people out of the money markets and get their dollars moving? Posted by Orrin Judd at June 10, 2003 1:10 PM