FINANCE PROFESSOR: MORE CUTS ARE NEEDED TO BOOST ECONOMY
MUNCIE, Ind. -- The Federal Reserve's half-percent cut in interest rates this week is the right move, but more is needed to resuscitate an ailing economy, says a Ball State University professor.
Additional interest rate reductions and a major income tax cut should boost the sluggish economy, said Grant Wells, a finance professor.
The combination of income tax and interest rate cuts should be felt in about eight to 15 months, he said.
"This isn't like a light bulb because it would happen immediately," Wells said. "The economy should improve, helping next Christmas' retail sales, if Congress can push through income tax cuts fairly quickly."
The Federal Reserve was reducing its target for the federal funds rate, the interest that banks charge each other, to 5.5 percent. It was 6.5 percent at the start of the year.
The second rate reduction in three weeks is viewed as the central bank's attempt to stave off a possible recession, Wells said.
"I don't think this is the last cut by the Fed," he said. "I think we are going to see several more in the coming months."
He believes the Fed's attempt to control inflation and to slow growth by increasing rates six times last year effectively killed America's expanding economy.
"The economy slowed considerably last year and I don't think the Federal Reserve was aware of how much it had slowed," he said. "When they raised rates last June, they killed the economy."
Adding to the fuel is a drop in consumer confidence based in part to the loss of millions of dollars in retirement funds invested in the struggling stock market, Wells said.
The once high-flying NASDAQ, the high-tech stock market, dropped about 40 percent in value last year and other stock markets fell considerably in the last half of 2000.
"People look at their 401K retirement accounts and see that a lot of the value has disappeared," Wells said. "They felt poorer in the last two quarters and cut back on their spending. Retail sales suffered because of that.
"Then American industries began to cut back, laying off thousands of people. Add to that the rising cost of energy. People are putting their money into keeping their houses warm instead of buying big ticket items," he said.
Grant blamed part of the drop in consumer confidence on individuals looking at their 401K and other retirement investments from quarter to quarter instead of over a longer period of time.
"If you are retiring this year, you might have a problem," he said. "But, if you are retiring 25 to 30 years down the road, I wouldn't worry."
(NOTE TO EDITORS: For more information, contact Wells at (765) 285-5219. For more stories, visit the Ball State University News Center at www.bsu.edu/news on the World Wide Web.)
Marc Ransford2/2/01
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