NEW YORK - On the day that Alan Greenspan suggested that the U.S. economy was indeed cooling off, T. Rowe Price Associates Inc.'s chief economist said the Federal Reserve may lower interest rates by a full percentage point over the next year.
"In this environment, the Fed is going to have room to ease and perhaps ease significantly," Alan D. Levenson said at the Baltimore mutual fund company's annual investment and economic outlook seminar.
"We could get meaningful Fed easing over the next year even in a soft landing," Levenson said. "The Fed has to wait for sure that the economy has cried uncle."
Indeed, a rate cut might be in the offing. Greenspan, the Fed chairman, indicated yesterday that the central bank is sensitive to the impact that the declining stock market and a tighter credit market is having on the economy.
The Fed has raised interest rates six times since June 1999.
Greenspan's move was "not a huge surprise," Levenson said. "It is a comfort to know that the Fed is aware that the tightening is beginning to have an effect over a broader array of financial conditions."
Levenson was among a handful of Price executives and fund managers who spoke with reporters in a gathering here yesterday.
Robert W. Smith, manager of the T. Rowe Price Global Stock Fund and the Growth Stock Fund, said the recent decline in the stock market has reminded investors that the market moves in cycles.
"We feel common sense has come to the market," Smith said. "Markets just don't go up forever."
Smith said he expects corporate profitability to slow in the fourth quarter and the first quarter of 2001, which could mean more rocky days for stocks. Investors have punished companies for missing earnings targets by dumping shares and shaving billions of dollars off their market capitalizations.
But Smith sees a silver lining to the steep declines in the stock market: Quality companies such as Cisco Systems Inc. are trading at much more attractive prices than they were months ago, and investors don't appear to be speculating as they were earlier this year.
"You have probably taken speculation out of the market, and I think people are going to focus on fundamentals," he said.
What investors are going to have to adjust to, the Price executives said, is that the once white-hot economy is simply not as robust as it was.
Consumer spending is falling; unemployment is edging higher; higher oil prices are eating into disposable income; and banks are tightening credit standards, making loans harder to come by. In addition, overseas growth among our trading partners is slowing and demand for U.S. products could slacken, Levenson said.
"That is also going to take some steam out of growth," he said. "There are a lot of things mounting against growth."
But Levenson said he believes that it is unlikely that the U.S. economy is heading for recession, putting the odds of that at 20 percent next year. In the past 18 years, the country has had just eight months of recession, he said.
"It seems to me the chances of recession are fairly low," he said. "It doesn't make a lot of sense to forecast recession."
Levenson said he expects the U.S. economy to grow at a rate of 2.5 to 2.75 percent in 2001.
