Analysts predict and hope the Fed will reduce interest rates again

The Outlook

February 04, 1996|By Jay Hancock

FACED WITH new evidence of sluggish economic growth across the country, the Federal Reserve last week cut short-term interest rates. It lowered the federal funds rate, which banks charge each other for overnight loans, from 5.5 percent to 5.25 percent. It also cut the more-symbolic discount rate, charged to banks borrowing directly from the Fed, from 5.25 percent to 5.0 percent.

Many analysts expect more reductions, but they caution that the quality of recent economic data may have been hurt by the federal government's shutdown. And recent bad weather has temporarily depressed employment, making trends harder to discern. A sharp upward revision in employment-growth and inflation measurements could make the Fed hesitant about further cuts or even reversing course.

Investors also worry about the price of gold, which has risen recently and sometimes indicates that inflation will become worse. Bond owners hate inflation because it lets borrowers repay debts with less-valuable dollars.

A Labor Department report released Friday contained data to cheer both optimists and pessimists. Rising unemployment -- from 5.6 percent to 5.8 percent -- signals weaker inflation pressure. But other figures showed that wages may be rising faster than previously thought, which would make inflation worse.

Even so, most reports in recent weeks -- retail sales, factory purchasing, personal income, consumer prices -- support arguments that growth is minimal and inflation tame. With that in mind, what will the Fed do next?

Charles McMillion

President, MBG Information Services

I have been concerned with the weakening national economy for several months. And I continue to be concerned. I think the Fed did too little too late in cutting a quarter.

I would have felt much better had they cut a half point. But the truth is that the government shutdown and all the uncertain data make it hard for any of us to get a handle on it. Friday's unemployment numbers, if true, are very bad news. There's just been a string of dreadful reports: retail sales figures, weak profits of companies, unemployment claims. This is not an exact science under the best circumstances.

The economy nationally is unusually diverse, with boom times in the Rocky Mountain region and recession in Maryland and difficulty all up and down the mid-Atlantic coast.

It's important for your readers to understand that not all the United States is like Maryland, that it really is booming in the Rocky Mountains, and that inflation is a concern out there, or growth getting out of hand.

But inflation is under control, and there are a lot of other concerns in this economy. There is now reasonably widespread weakness outside the U.S., as well. I think they're going to have to come back again and lower rates -- maybe by another half-percent.

Or I think they should. Whether they will, we'll see.

Robert Sweet

Chief economist, First National Bank of Md. financial management division

I don't think they've eased enough, because the economy is still sluggish, especially on the part of the consumer. The job numbers on Friday were worse than expected, and unemployment is now up to 5.8 percent. I think there's probably another half-point cut in the federal funds rate this year.

However, I don't know if they'll do it in March, which is the next time they meet. [Fed chairman Alan] Greenspan is concerned about inflation coming back again.

I don't think inflation's an issue, but the market is concerned because the price of gold has now risen to $420 an ounce.

But I am favorably impressed with the Fed's moves so far. And I am looking for another cut in the Fed funds rate. I think it'll eventually go below 5 percent.

Ann O'Brien Franklin

Chief economist, Maryland Board of Revenue Estimates

We're looking for the federal funds rate to be down to about 5 percent by the end of the year. Most of the indicators look weak, but the Fed was cautious because they're pretty much flying blind with the lack of data -- caused by the federal shutdown.

The Fed has come really far in building up confidence in its inflation-fighting ability, and it doesn't want to give that up easily. And there have been some mixed signals.

The unemployment rate has been signaling relatively tight labor markets for quite a while. But there's a lot of uncertainty about how good a measurement that is right now.

The most recent inflation data show that inflation has stayed under 3 percent for four years in a row. That suggests inflation is under control. The federal funds rate compared with inflation is still pretty restrictive. I think they'll continue to ease, probably in small steps like this, while they watch the data. The Fed is also looking for a credible budget package, and we're not really there yet. There's been some resolution, but there hasn't been a full-blown package.

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