Fed Inaction Boosts Case for Tax Cut

The Fed declined to lower interest rates but did say it was concerned about long-term growth, signaling a possible cut in rates at its next meeting in late January 2001.

"While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased. The committee will continue to monitor closely the evolving economic situation," said the Fed in Tuesday's statement.

Analysts say the move will increase congressional support for a tax cut, which President-elect Bush has made a legislative priority.

"There's a growing concern in Congress about softness in the economy that is increasing the support for a broader and larger array of tax cuts," said Christopher Frenze, chief economist at the congressional Joint Economic Commission.

Monday, the JEC's vice chairman, Rep. Jim Saxton, R-N.J., issued a statement calling on the Fed to cut interest rates and for Congress to pass an array of tax cuts to halt the "sudden and significant" downturn in the U.S. economy.

Financial markets reacted negatively to the news. The Nasdaq composite index plunged after the 2:15 p.m. announcement, falling more than 100 points to close at 2511.45, a new low for 2000. The Dow, which had been up more than 170 points early in the day, closed down more than 50 points.

"A rate cut in January is better than nothing, but the markets clearly wanted a cut today," said financial strategist Johnny Hea of IdeaGlobal Analytics. "There's a lot of skittishness that the Fed will not be able to turn a potential recession around in time."

Fed Chairman Alan Greenspan has not spoken publicly about tax cuts since last summer, when he indicated his preference for using the budget surplus to pay off the national debt. Bush met with Greenspan on Monday but declined to discuss the details of their conversation.

"I talked with a good man right here," Bush said, placing his hand on Greenspan's shoulder, in a question-and-answer session after the meeting. "We had a very strong discussion about my confidence in his abilities."

During the administration of Bush's father, Republican officials blamed Greenspan for rate increases that sparked a recession and contributed to George Bush's defeat.

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