Year-End Calendar Drives Economic Decisions

The calendar tells the story.

Thanksgiving is this week, and Christmas looms ahead. Before you know it we will be into a new year and - gads! - a presidential election.

These dates more than anything else are dominating business and financial markets these days. They are affecting sales, interest rates, even the stock market.

This is the time of year when many investors and portfolio managers harvest pre-Thanksgiving profits, readying strategies for a new year. But with market indexes hitting new highs daily, will they have the courage to sell this year?

This is also a period in which savvy investors avoid mutual fund purchases, lest they receive unexpected and unwanted taxable capital gains distributions.

And this is the time of year when some portfolio managers, anticipating a January uptick in the markets when pension and funds are invested, begin planning December purchases to get ahead of the game.

This is also the season when retail experts and others issue gloomy predictions about holiday sales. They are doing it again this year. High credit card debt combined with consumer caution induced by widespread layoffs are supposed to equal a lousy Christmas season.

Overshadowing all other economic considerations, though, is the fact that 1996 presidential and congressional campaigning has already started.

This is what all the jockeying is about in Washington these days. And no matter how the debt-limit, budget-deficit battle plays out, the likely result will be lower interest rates.

Economists expect the Federal Reserve System to cut rates as a reward to Congress and the president for coming up with a believable deficit reduction package, whether it is the Gingrich/Dole version or Clinton’s. Only the timing is in doubt.

Compared with inflation, interest rates are historically high. The federal funds rate - a benchmark rate influenced by the Federal Reserve - is holding at the Fed’s target rate of 5.75 percent. Consumer inflation for the past year averaged 2.5 percent.

This spread of 3.25 - known as the real interest rate - compares with an historical average of between 2 and 3 percent.

So there’s room for a cut. But most economists expect the Fed to wait until early 1996 to change short-term interest rates.