Fed will cut rates, or it won't 3 central bank watchers vote 2-1 in favor

The Outlook

September 13, 1998|By Kristine Henry

THE STOCK MARKET shot up a record 380 points Tuesday on the strength of comments from Federal Reserve Chairman Alan Greenspan that the Fed was just as likely to lower interest rates as it was to raise them. What are the chances the Fed will really lower the benchmark federal fund rate -- the rate banks charge each other -- at its next meeting on Sept. 29? Should the rate be lowered? What would it mean to the average person?

Jim Glassman

Senior U.S. economist, Chase Securities, New York

I do think they will lower rates. The global environment is changing; the problems abroad are coming closer to home. The industrial sector has lost momentum. Corporate profits are no longer growing; they're flat compared to a year ago. Exporters have suffered a real loss of export growth.

The effect of lower rates is that, hopefully, there are people whose jobs will be saved. If the Fed does its job right, we never know it. What would the alternative be? If the Fed didn't ease up, interest rates would not stay down and companies would have to go through, as the economy slowed, layoffs and restructuring.

Everything in economics is based on perceptions, and by lowering interest rates it helps to bolster confidence, and it's hard to quantify that. As the Asians discovered, once you lose confidence a lot of bad things can happen.

James E. Annable

Chief economist, First National Bank of Chicago

The real issue is, is this turmoil throughout the world significantly slowing down the U.S. economy, and, if so, when would the Fed know and when can we expect a rate cut? Our analysis is no, it's not going to slow down the U.S. economy.

The economy will speed up because the GM strike is over -- by the fourth quarter that will add a full percentage point back to production. The most important thing is that unemployment has dropped very low, to a level we have not seen since the late 1960s. I don't think the chances of interest rates being cut are very likely at all.

If the Federal Reserve does cut rates, what you would get is a corresponding cut in the prime rate. That would affect average folks in a variety of ways. If they have an adjustable rate mortgage, they would have lower monthly payments. If they have variable rates on other loans or credit cards, then that rate would go down as well.

Nicholas Perna

Chief economist, Fleet Financial Group, Boston

I've been saying since last November that the next move by the Fed would be to cut interest rates. I got pessimistic about what was going on in Asia. The question is one of timing. It still is a long shot that they will act at the Sept. 29 meeting; they need more than the stock market to correct. What Mr. Greenspan and his colleagues really need to worry about is that the U.S. economy is going to be affected by what's going on throughout the world.

The jobs numbers we got [Sept. 4] were still fairly strong, but a little bit later in the year the Fed will have evidence of a weakening of the U.S. economy that will compel it to cut rates.

For the average person, the reason why the Fed would [lower rates] is important. It means the economy is in the process of slowing.

The Fed should not lower rates because of the stock market itself, or with the thought that a lower interest rate will somehow bail out Japan or Russia. But it should lower rates when there are signs that the U.S. economy is weakening and that it could weaken too much. If stock markets fell 20 percent and didn't do damage to the economy, then I think Greenspan would just say caveat emptor -- buyer beware. But, if there's a spillover effect, then I think he would act.

Pub Date: 9/13/98

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