Alan Greenspan is trying to calm jittery consumers and business investors who worry the sky is falling on their good times. For the sake of a sluggish economy, he'd better be successful. By cutting interest rates a full point in less than a month, the Fed chairman wants to shake the economy out of its doldrums and, by doing so, change the country's attitude toward investing in itself.
Lower interest rates save consumers on credit card debt and loans of all sorts from cars to mortgages. They encourage businesses to grow when the cost of borrowing is down. The point of the Fed's move to cut rates a half a point again is to spur spending and head off a threatened recession.
It is threatened in large part by Chicken Littles in both the business and consumer sectors hunkering down with their closed pocketbooks waiting for the other shoe to drop. And it could drop depending on how the financially squeamish respond to efforts to dissuade them that the end is near.
Huge numbers of Americans are following every tick on Wall Street because the bottom line of their retirement 401(k)s are tied to rising and falling stocks. So a jolting slowdown of the economy at the end of last year sent many into shock and immediate pullback of major expenditures.
That cooled a hot economy even faster, put the brakes on economic growth, and caused an alarming ripple throughout the marketplace that sent many businesses into a downward spiral. As demand for goods and services weakened, inventories began to pile up, workers were laid off, and spending was suspended.
The recipe for a recession was written, but it was half-baked because the ingredients for a full-blown fall are missing. The economy hasn't run out of steam, large retail chains are showing increased sales, mortgage applications are up, unemployment is still hovering at a 30-year low and, despite a wave of job cuts by corporate America, there is no great surge in joblessness on the horizon.
But there could be if consumer confidence in the economy takes another dive like it did between December and January, falling to its biggest one-month decline since the beginning of the 1990-91 recession. It is certainly true that consumer apprehension, whether reality-based or not, can become a self-fulfilling prophesy.
The Fed is aggressively lowering interest rates to ease anxieties about a slumping economy and change perceptions about business and employment prospects over the next few months.
A rebound in the second half of the year will show the strategy worked. Failure will mean the unfortunate prevailing assessment of the economy was not reconsidered.