Economy grows sluggishly in first quarter

McClatchy NewspapersApril 30, 2008 

WASHINGTON — The Federal Reserve lowered its benchmark lending rate by a quarter-point Wednesday, the seventh such move since last September, and made it clear that it was willing to cut rates in the future if the economy slows further or raise them if inflation sparks.

For the second consecutive meeting of the rate-setting Federal Open Market Committee, two voting members came out against the move in light of concerns that the high price of oil and commodities will spark inflation. Many financial analysts had predicted that the Fed would issue language that signaled it would now pause, having brought its benchmark federal funds rate, which banks charge each other for overnight lending, down from 5.25 percent last September to 2 percent on Wednesday.

But the Fed made clear that it still sees an economy facing turbulence.

"Recent information indicates that economic activity remains weak. Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters," the Fed statement said.

The Fed omitted language from previous statements citing downside risks to the economy, and that was seen by some analysts as a nod to those who worry because inflation — the change in prices that consumers face at the cash register — is running at an annual rate above 4 percent.

In its statement, the Fed acknowledged that some indicators of inflation expectations have turned negative recently, but it also said that it expects inflation threats to moderate over time.

"Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully," the Fed said.

Concerned about inflation, Dallas Reserve Bank President Richard Fisher and Philadelphia Reserve Bank President Charles Plosser voted against Wednesday's rate cut, favoring a pause.

Although the Fed didn't openly signal that it would pause to assess the effect of the cumulative rate cuts _ which make it cheaper to borrow — there are now eight weeks until the next rate-setting meeting, so absent an inter-meeting emergency move in response to financial turmoil, the Fed is effectively in a pause mode. It will spend that time assessing how rate cuts are being absorbed in the economy.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the Fed said.

Commercial banks generally follow the Fed's action in lockstep, meaning their prime rate, charged on loans to their best customers, will fall to 5 percent. That makes it cheaper to borrow, although it won't help fixed mortgage rates, which take their cue from long-term bonds. It won't help auto loans either, whose rates don't move in tandem with the prime rate.

Also Wednesday, a new government report showed that the U.S. economy grew at a sluggish rate of six-tenths of a percent over the first three months of 2008. It's hardly stellar growth, but it is cause for modest cheer since it suggests that there was just enough economic activity to avoid recession — though that may be a distinction without a real difference, since the growth is all but imperceptible.

The 0.6 percent growth rate for the first quarter of 2008, reported by the Commerce Department, is identical to that of the fourth quarter of 2007, meaning that the U.S. economy has been in a virtual stall for half a year. The question now is whether an economic stimulus plan passed by Congress in February and the 3.25 percentage point drop in interest rates by the Federal Reserve will soon revive the economy.

In a news conference Tuesday, President Bush repeated that he's confident that tax rebates being sent to Americans as part of the stimulus package will help restore consumer confidence and boost economic activity. The first of the checks went out on Monday and will keep arriving until July.

Many U.S. economists believe that the nation is in recession, commonly defined as two consecutive quarters of negative growth. Wednesday's numbers suggest that if the U.S. is in a recession, it is on the front end that began over the last month or so. There have been three consecutive months of employment losses, but those losses were far less than is usually associated with recession.

Exports have helped keep the U.S. economy just above negative growth, helping offset the sharp loss in business activity associated with the slumping housing and automotive sectors.

Economists don't expect any sharp rebound in economic growth until late this year.

"We expect little change to the slowly declining trend in domestic demand this quarter, with potential improvement in the second half of the year," said Peter Kretzmer, an economist with Bank of America, in a note to investors Wednesday morning.

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