Fed Restraint Can Prop Up U.S. Economy

Then I went home to the ultimate economic indicator -- my parents. They work in real estate law, helping people refinance and buy their homes.

Their business has slowed considerably because interest rates are too high for people to borrow money for big purchases such as houses or land.

My dad had predicted all fall that Alan Greenspan and the Federal Reserve Board were flirting with danger as they continually raised interest rates to counter inflationary tendencies in the rapidly growing economy.

Turns out he was right.

If the previous paragraph sounds like Greek, let me explain.

From what I remember of Art Benavie's Economics 10 class, economists divide a person's income into money they save and money they spend. In a good economy, people are more likely to spend money than save it. Inflation can occur in a good economy because people might be willing to pay more for the same goods, therefore reducing how much a dollar is worth.

The Federal Reserve must keep watch over economic growth to make sure prices don't get too high too fast.

One of the most effective ways to control the economy is to alter spending on big items requiring people or businesses to borrow money. If interest rates are low, people will spend more because it costs them less in the long term to pay back their loans.

But as interest rates increase, fewer people are willing to take out loans and therefore spend money on goods and services. The lower spending rate slows the economy.

It's a delicate balance that the Fed seems to have tipped over in its attempts to control the economy.

Indicators seem to show we're slowing to a halt after the nation's longest economic expansion ever.

More people filed for unemployment benefits in December than any time in the last 2 1/2 years. Christmas spending, usually the biggest time of the year for retail, was a disappointment. And stock markets have spiraled downward.

But all is not lost.

Greenspan and the Fed cut interest rates Jan. 4 for banks borrowing money, the first rate reduction since November 1998. It's likely they'll implement more rate cuts in coming months.

The rate decreases still must trickle down to consumers and businesses. Analysts think the economy will get worse before it gets better.

Yet David Gardner, founder of investment guide The Motley Fool, says it's not time to toss around the "R-word" (recession) quite yet.

Gardner said the economic definition of recession is two consecutive quarters of decline in the gross domestic product. In other words, that's six months when our economy has produced goods and services of a lesser total value than in previous months, adjusted for inflation.

Right now, he said, we have still seen positive growth every quarter.

"It's slowing growth, but it's still growth," Gardner said.

GDP measures lag by three months, so economists are currently analyzing data gathered through September. Gardner said we won't know if we're presently in a recession until the spring.

But he said the worst might be over for the stock market.

"Frequently the stock market gets nailed before the official recognition of the recession," he said. "The stock market already got crushed over the last 10 months."

Gardner even suggests this might be the time to invest while prices are low, which will drive up the stock market again.

So while the outlook is certainly not good, there's hope for those of us soon to enter the economy of the real world.

Hopefully we can trust Greenspan and the Fed to do better at striking a balance this time, then leaving the economy alone.

Columnist Anne Fawcett can be reached at fawcetta@hotmail.com.