- The good news of the Federal Reserve's surprise interest-rate cuts could hide a more worrisome message - that the U.S. economy is sicker than anyone realized.
"For them to take this action says that they are very concerned about the economy," said Tucker Hart Adams, an economist with U.S. Bank.
The Fed normally acts in measured ways and carefully signals its actions, except for emergencies, said Tom Schlesinger, executive director of the Financial Markets Center in Philomont, Va.
Rarely does it cut rates apart from a meeting of the Federal Open Markets Committee, which was set to meet at the end of the month, and normally it decreases rates a quarter of a point.
The last time the Fed cut rates between FOMC meetings was in 1998, when Russia defaulted on its debt and problems with the Long Term Capital hedge fund threatened an international credit crunch.
If a global meltdown deserved a quarter-point cut, then why did a soft landing with low unemployment, continued wage gains and strong productivity deserve a halfpoint cut, economists asked?
"I think the Fed panicked. They are realizing the economy is moving very fast into a recession," said Gary Shilling, an economist with Shilling & Associates.
If the economy is headed for a hard landing, the rate cuts could prove too little, too late. Interestrate moves, either up or down, can take six months to a year to influence the larger economy, economists said.
Adams said the "hidden" information that the Federal Reserve may have relates to unemployment. The employment report, scheduled for release on Friday, may show an unexpected rise in layoffs.
"If people are not losing their jobs, it would be foolish to take a lot of action," Adams said.
Shilling has a different take. Fed Chairman Alan Greenspan's background and interest make him more sensitive to the industrial economy. The suffering in the technology sector was not enough to motivate a rate cut. But a sharp decline in the National Manufacturer's Association Purchasing Manager's Index, unveiled on Tuesday, showed that the country's industrial core was in danger.
"I would imagine that Greenspan is deadly afraid of a recession," Shilling said.
What confuses economists is that the inflation rate hasn't really changed much since the Federal Reserve started raising rates 18 months ago.
"Inflation is at about the same place where it was when they started the rate hikes," Schlesinger said. Schlesinger said the inside information motivating the surprise action could relate to deteriorating credit quality at the banks the Fed regulates.
Some economists said there was no hidden message and that the Fed acted with unusual clarity and conviction.
"The biggest risk is that the rate cut is misinterpreted," said Diane Swonk, chief economist at Bank One Corp. in Chicago. She called the Fed action an "insurance policy against a recession." The message, a positive one, was targeted at Wall Street, the new Bush administration and the average consumer.
"The Federal Reserve will defend growth and defend this expansion," she said.
Stock investors seemed to agree. They drove the Nasdaq up to a record one-day gain. Among the best performers were technology and other growth stocks that had fared well in the late 1990s. Swonk said the message for President-elect George W. Bush is that the Fed is more interested in debt reduction than in the tax cuts his administration has proposed.
"This takes the steam out of the argument for tax cuts," she said. She also said that Greenspan hedged his bets with the new administration.
"He didn't want to be blamed for another Bush recession." Shilling said it appears the Fed felt enough confidence that the stock market bubble was popped to risk cutting rates.
"They felt there was enough damage done, that we wouldn't get a return to irrational exuberance," he said.
Schlesinger said that while he applauds the rate cuts, they fail to address a deeper concern that could continue to haunt the economy.
"There is an absolute problem. It is the excessive confidence people have in the Fed to make all the problems go away," he said.