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Economic Fears Could Cast Cloud Over A Recovery

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By JEANNINE AVERSA, The Associated Press

Published: January 23, 2008

WASHINGTON - When people are panicking, it's hard to stop the stampede with talk about cutting a "federal funds rate." Economic fears on Wall Street and around the world are making people and businesses hunker down, and that could make recession worries come true - a vicious cycle the Federal Reserve, White House and Congress may be hard-pressed to break.

Official Washington is in crisis-management mode. Almost everyone says more action is needed.

Panic can make people and businesses alter behavior by cutting spending or curtailing hiring and capital investment. That can make it worse for the economy. A gloomy mind-set can be a self-fulfilling prophecy. To break it, more Fed rate cuts are likely needed.

"This is only the appetizer. The main course is going to be served up next week" when the Fed is likely to lower its key rate by one-half percentage point, said Ken Mayland, president of ClearView Economics.

Many economists think the rate, now 3.5 percent, could fall to 2.5 percent, possibly lower, by spring.

For many people, that may mean lower interest rates on some credit cards, home equity and other loans. It could give some relief to some adjustable-rate mortgages. If people pay less interest, they may shop more, which would help energize the economy. For businesses, lower interest rates could spur capital investment and hiring.

Most people think that will not be enough.

The Bush administration and Congress promise to quickly approve an economic stimulus package to get cash into people's hands, hoping they'll spend it quickly. Recognizing the urgency, both sides appear to be putting aside some political differences.

There are some things the administration has little or no control over: higher prices in home heating oil bills and at the gas pump. There's a possibility banks will rack up multibillion-dollar losses due to bad mortgage investments. The losses have to run their course, and could fuel greater panic.

There was some thought the Fed's dramatic move Tuesday may have added to the skittishness. "You have the Fed sending the message that something is seriously wrong," said Richard Yamarone, economist at Argus Research. "Most people do believe that we are in a recession."

The Fed's rate cuts take months to work through the economy. The same goes for a stimulus package.

Senate Majority Leader Harry Reid, D-Nev., said the goal is to get a deal through Congress and to Bush in about three weeks. Bush said he is confident Congress and the administration will be able to approve a package. Will that avert a recession or at least cushion the blow?

"The Fed and other policy-makers in Washington are trying to avoid what people fear the most, an oncoming recession. If they can calm those fears, perhaps not today or tomorrow, but down the road, that would go a long way in stabilizing the situation," said Victor Li, an economics professor at Villanova School of Business.

Lower interest rates or a stimulus package may not be enough. People may want to see lower unemployment or higher retail spending. The economy is dealing with a huge unknown: the magnitude of the housing crash and credit crunch.

With uncertainty comes more fear: a return to the vicious cycle.

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