Fed rate cuts urged Central bank looking at wrong indicators, Legg gathering is told

U.S. outlook

December 11, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF

NEW YORK -- The Federal Reserve Board has been looking at the wrong indicators, and it should be cutting interest rates instead of holding them where they are, the chief economist with a Legg Mason Inc. subsidiary said yesterday.

Scott F. Grannis, director and chief economist with Pasadena, Calif.-based Western Asset Management Co., said the Fed should have already cut long-term interest rates to 4 percent or 5 percent. The rate on the 30-year Treasury bond is 6.1 percent.

He said the economy is slowing, the dollar is too high and prices on commodities and consumer goods are falling. "We are beginning to feel the deflating effect," Grannis said. "When prices are falling, that means the Fed is too tight. They have got to ease."

Grannis spoke to reporters in New York yesterday at Legg Mason's end-of-year economic review and outlook.

His views were backed by the other Legg Mason executives, including Raymond A. "Chip" Mason, chairman and chief executive of the Baltimore-based brokerage and money management firm.

"I think interest rates will continue to go down," Mason said. "U.S. rates are too high now, certainly related to everywhere else. I would be surprised if they don't go lower."

Grannis said the Fed is basing its decision to keep rates where they are on the U.S.' low unemployment rate. Rather, he said, the central bank should be looking at the slowdown in manufacturing activity; falling prices of commodities, such as gold; and the rising dollar, which is not only hurting companies that export goods, but also is exacerbating Asia's economic crisis.

"They are looking at the wrong thing," Grannis said.

Lower interest rates could stimulate the economy and, in turn, push the stock market higher.

But Legg executives don't see the stock market growing at the brisk pace of the last three years.

William H. Miller III, president of Legg Mason Fund Adviser Inc. and manager of the successful Value Trust mutual fund, expects the market to rise by 8 percent to 10 percent next year.

He said the market has entered a "new era," marked by slower growth and higher volatility. No longer should investors expect to see 20 and 30 percent gains in benchmarks such as the Dow Jones industrial average and the Standard & Poor's 500 stock index.

"The economy can't get any better," Miller said. "The best we can hope for is a continuation of this environment."

Miller sees stocks outperforming bonds, and bonds doing better than cash instruments.

What could hurt the market next year is continuing problems in Asia.

The executives were concerned about whether Japan can correct problems with its banking system, and whether other Asian countries such as Thailand and Malaysia recover from massive spending and overbuilding.

"There is no way to sort that through," Mason said. "There is no way to know until it starts unfolding."

Pub Date: 12/11/97

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