Fed Acted Forcefully
December 12, 2003
It may ultimately be said of Alan Greenspan that he enjoyed his finest hour when the public admired him least. Only a few months ago the shaky economic outlook inspired fears of deflation -- a general decline in prices caused by too much supply (of unemployed workers, unused fiber-optics and lots more) chasing too little demand. Now the U.S. economy is leading a global recovery. Greenspan and the Federal Reserve deserve much -- if not all -- of the credit for this turnaround, says Robert Samuelson.
What Greenspan & Co. may have done is to avoid a colossal blunder. So much was beginning to go wrong with the economy at the end of 2000 -- and the rest of the world was so dependent on the U.S. economy -- that a timid reaction from the Fed might have been fatal.
- It cut interest rates 11 times in 2001 and once again in 2002 and 2003.
- The Fed funds rate (on overnight loans between banks) went from 6.5 percent in late 2000 to its present 1 percent, the lowest since 1958.
- First, the economy's revival also has other causes: big tax cuts, innate American optimism, the ability of U.S. companies to cut costs and improve profits.
- Second, the revival still faces many threats: the fading effects of tax cuts and lower interest rates (the mortgage-refinancing boom), cautiousness in corporate America, high levels of consumer debt and weak economies in Europe, Japan and Latin America.
Source: Robert J. Samuelson, "Greenspan's Finest Hour?" Washington Post, December 12, 2003.
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