See Economy Improving
By Joseph Lisanti
The Federal Open Market Committee is likely to ease short-term interest rates for the 13th time since January 2001 when it meets on June 24 and 25. If the last dozen moves lower haven't gotten the U.S. economy out of the doldrums, why should this one?
With the fed funds rate (what banks charge each other for overnight loans) already at a four-decade low, how much effect would another quarter-point reduction have? In real terms, not much, though it might encourage some homeowners to refinance their mortgages again.
The true value is symbolic. A rate cut would signal that the Fed is willing to act to prevent the economy from slipping back into recession. With initial claims for unemployment insurance above 400,000 for 14 consecutive weeks and capacity utilization at a 20-year low, the economy is not experiencing robust growth. Add to that the anecdotal evidence from companies that demand remains sluggish--many corporations are increasing earnings only by cutting costs--and you have the potential for a double-dip recession.
S&P's chief economist David Wyss does not expect a double dip. He believes that real gross domestic product will continue to rise, but not rapidly enough to boost employment in the near term. As this year's crop of college graduates hits the job market, we could see the unemployment rate edge a bit higher.
Weak capital spending also remains a concern, but Wyss notes that some growth should come from replacement demand. Short-life technology equipment bought in the late 1990s is rapidly becoming obsolete.
Finally, last week's tax cut should provide some stimulus, as will lower energy prices and the cumulative effect of previous Fed rate reductions. The expected rate cut should simply add to the momentum for stronger growth in the second half.
With bond yields down and stock dividends now taxed at lower rates, equities should be attractive to more investors.
Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook
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