Despite heavy pressure from the Bush administration, the central bank has been slow to bring interest rates down. Fed chairman Alan Greenspan has worried that inflation, which ran 6.1 percent last year, could get out of hand if the economy moves too fast. Investors have been nervous, too: although short-term interest rates have tumbled since December, rates on longterm bonds, which are the key to everything from mortgages to business investment, have barely budged. “Psychologically, the financial markets have been consistently afraid of a resurgence of inflation,” says Samuel Kahan of Fuji Securities in Chicago. “When you deal with fears, not facts, that can linger for a long time.”
On Friday morning new data altered the picture: retail sales fell 0.7 percent in August, pointing to an economy at a standstill, while consumer prices rose only 0.2 percent for the third straight month. Within minutes the Fed dropped its discount rate to 5.0 percent and major banks lowered their prime rates to 8 percent. That should avert a relapse into recession, but it won’t set the economy on fire. “We’re going to have to see some additional rate cuts before we get real optimistic,” says economist Lynn Michaelis of timber giant Weyerhaeuser Corp. The National Retail Federation predicts this fall’s sales will be up a scant 2 percent over last year’s miserable results. Santa shouldn’t be too cheerful. Sales down, jitters up: In a New York store The ‘contingent’ work force lurks in a shadow, with no security, no benefits and no certain future (JACQUES CHENET-NEWSWEEK)
