Like Mardi Gras, the stock market's short party ended on Ash Wednesday, when Federal Reserve Rex King Alan Greenspan let investors know they wouldn't be visiting the Big Easy this week.

        The Fed's next meeting isn't until March 20, but investors hoped the central bank would cut rates this week after continued bad news on the economy. Wednesday, however, Mr. Greenspan told the House Financial Services Committee he thought the slide in the economy appeared to be slowing.

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Cincinnati Economic Indicators

        Hopes of an early rate cut evaporated, and the stock markets plunged. In further testimony Friday, Mr. Greenspan wouldn't give any hints when asked outright if the Fed was going to lower interest rates soon. But that didn't rule out a cut in rates at the Fed's next meeting.

        Many economists say the Fed will cut interest rates another half point March 20. But this week, there were no signs of emergency that would have warranted a rate cut.

        Unless there's a stock market panic, an interest rate cut today “won't make a difference now,” said Gordon Richards, chief economist for the National Association of Manufacturers. The effects won't be felt until the fall. “There's a tendency on the part of non-economists to ignore the lags that are inherent in economics,” he said.

        Investors are concerned about the plunge in consumer confidence. The University of Michigan index, at a 50-year high last January, has fallen 24 percent in the past three months. “Consumers have become much less certain about their future income and job prospects, and it's this sense of uncertainty that's causing them to pull back on their spending,” said Richard Curtin, the survey's director.

        “What will solve this problem is more robust growth in the economy that the consumers see as securing their future job and income prospects.”

        While confidence is plunging, spending is not. The Commerce Department reported Thursday that Americans' incomes rose 0.6 percent in February, and their spending rose 0.7 percent. Both of those figures were better than January's, and above what economist had expected. In addition, cars and light trucks sold in February at an annual rate of 14.2 million, again above what economists had expected.

        Mr. Richards' advice is to ignore the confidence data, because it's not a good predictor of consumer spending.

        While confidence numbers can jump around, spending tends to follow a smooth trend. That's because regardless of how consumers feel about their future, they still have to pay their mortgages, their utilities and their grocery bills. “What consumers do is smooth spending to avoid big disruptions in their standard of living,” he said.

        That kind of conflicting data wasn't likely to signal an emergency rate cut by the Fed.

        “If I were the Fed, I wouldn't mind having a little more time and a little more data before I had to make another assessment of just what's going on here,” said Ward McCarthy, managing director of Stone & McCarthy, a financial research firm in Princeton, N.J.

        He guessed three things made investors hope for a rate cut this week:

        • The continued slide of the NASDAQ stock index, which is down more than 20 percent since Feb. 1.

        • Concerns about the ripple effects of the banking crisis in Turkey, which caused Procter & Gamble Co. this week to cut its profits expectations.

        • Timing. If the Fed were to pull an intermeeting rate cut, as it did Jan. 3, this week was the last chance to do it. Come Monday, the next Fed meeting is too close to warrant an intermeeting cut.

        It can be argued, however, that the Fed hasn't yet begun to try to strengthen the economy. With two January rate cuts totaling a full percentage point, the Fed has eased, but that doesn't mean money is easy.

        A federal funds rate of 5.5 percent means “policy is fairly neutral,” said Gregory Hess of Oberlin College, a member of the Fed-watching Shadow Open Market Committee. “The fed funds rate is at its midpoint, where the Fed likes to have it in terms of its long-run inflation goals and long-run views of interest rates.”

        The rate cut that economists are calling for — and that investors expect — would finally put the Fed into a position of trying to stimulate the economy. The National Association of Manufacturers sent a letter to the Fed last week, encouraging it to cut the fed funds rate a half point to 5.0 percent, and soon.

        The reasons:

        • The big inventories that businesses built up in 2000 still haven't been worked down, and manufacturers won't ratchet up production until more of that inventory disappears. “We're arguing that we need to raise consumer demand” with a rate cut to help reduce inventories, Mr. Richards said.

        • Foreign trade is still weak. “The world economy, there's not much we can do about it, so we've got to grow more through domestic demand,” he said.

        • The slump in the stock markets is trimming household wealth. A fed funds rate of 5.0 percent “provides a firmer underpinning for a rally in the market,” Mr. Richards said.

        Mr. Hess said he thinks the Fed won't watch the stock markets, unless there's a crash. He thinks the Fed will be watching for signs of strength in March, because January and February are typically slow months for auto dealers and retailers.

        Mr. Greenspan's testimony Wednesday showed “he sees a V-shaped path” for the economy, Mr. Richards said. “We'll get a couple of weak quarters, then return to higher growth.

        “What he doesn't say is, will the return to higher growth be contingent on the Fed cutting rates more aggressively? He sort of hints at that. As always, Greenspan keeps his options open.”

Fed's timing defended
       

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