|
The Federal Reserve has left interest rates unchanged. The Fed's subtle hints are that economic recovery is already underway and a cut in interest rates is not necessary while a raise will have to wait.
Central Banks, world over, have always considered the manipulation of interest rates as an imperative tool for regulating economic activity. For an economy expanding at an unprecedented pace, increasing the rates dampens economic activity. Similarly, for a sagging economy lowering the rates works as an expansionary tool for revival. This judicious mix of monetary policies enables the Central Bank to maintain economic stability. The Fed, and its celebrated helmsman, Alan Greenspan have always acted in the same spirit whenever the US economy showed signs of significant deviation from stability. The effort intensified when the country's finances was in the grip of an economic recession. Throughout 2001, the Fed ruthlessly slashed interest rates by no less than 11 times in a desperate effort to avoid the economic downturn. When the September 11 terrorist attacks pushed the US economy to the brink, the Fed promptly responded by further reducing the rates to a bare minimal, very close to zero. Currently the Fed's target rates are at 1.75 percent. However, without paying any heed to the rate cuts, the US economy has ended in a recession. The rate cuts largely proved the inefficacy of monetary policies in combating the devastating tidal wave of recession that had an equally grave cascading effect. Renu Kohli is also of the opinion that the indiscriminate interest rate cuts have not helped in avoiding the recession.
Now, more than seven months after the terrorist attacks, the economy is finally showing early signs of recovery. The last months of 2001, which included the festive season of Christmas and the plethora of zero financing schemes offered by auto manufacturers acted in favor of the economy. The result was improved consumer spending, falling inventory levels, which in turn, expected to boost production in the coming quarters.
As per the business outlook survey, conducted by the Federal Reserve Bank of Philadelphia, the diffusion index of current activity remained positive for the third consecutive month but declined slightly from 16.0 in February to 11.4 in March. After 13 months of negative readings, the three months of positive indicators represent growing evidence of a recovery in the manufacturing sector. The percentage of firms (35), which have indicated an increase in activity, is more than those firms (24) that have indicated a fall in activity levels. The survey shows a positive trend in the new orders and shipments indicators. The new orders index recorded 7.3 declining from 13.7 in February while the shipments index recorded 7.7 as against 16.6 in February. Inventories have continued to decline albeit at a slower pace now. The inventory index improved from -14.8 to -7.1. Both the future prices paid and received indices increased. The index for future prices paid rose to 38.3 from 23.0 in February (highest in 16 months), while the future price received index 15.8 to 19.4 (highest in 24 months).
|
