Fed Watchers Take Pessimistic View

The Federal Reserve should move immediately to reduce interest rates or face the risk that the country could topple into recession next year, a group of business and academic economists said Monday.

The Shadow Open Market Committee, which keeps close tabs on Fed policy, urged the central bank at its next policy meeting on Sept. 26 to approve immediate reductions in interest rates as part of an effort to boost growth in the nation’s money supply.

“Interest rates are too high. The Fed has remained too tight, too long,” said Allen Meltzer, an economist at Carnegie-Mellon University in Pittsburgh.

Meltzer was a founder of the shadow committee in 1973. The panel meets twice a year and is composed of economists known as monetarists, who believe that the key determinant of economic performance is growth of the nation’s money supply.

Meltzer said the monetary base, composed of currency and bank reserves, was expanding at an annual rate of just 4.5 percent. He said to avoid a recession, this measure of the money supply should be growing by 6 percent annually.

The Fed cut interest rates for the first time in nearly three years on July 6, reducing its target for the federal funds rate, the interest that banks charge each other, from 6 percent down to 5.75 percent.

While that reduction spurred a big rally on Wall Street, the central bank’s Federal Open Market Committee, the group that sets interest rate policy, passed up a chance to cut rates further when it met Aug. 22.

The next meeting of the FOMC is Sept. 26 and private economists are split on what could happen. Some believe the central bank will cut rates further at that time while other analysts think that recent signs of an economic rebound will keep the Fed on the sidelines.

Mickey Levy, chief financial economist at NationsBank in New York and another member of the group, said the economic panel was unanimous that inflation was not a problem and therefore the central bank had room to ease credit conditions further. He said he believed recent signs of an upturn in demand would be short-lived.

“If the Fed fails to respond and ease, that raises the probability of a recession in 1996,” Levy said.

In addition to calling for Fed interest rate cuts, the panel of economists attacked a proposal backed by the United States and its major economic allies to deal with future Mexican-style crises by creating an emergency bailout fund under the supervision of the International Monetary Fund.

This approach, which will be addressed by the 179-nation IMF at its annual meeting next month, “goes in the wrong direction. It would encourage bad policies, not discourage them” by offering a bailout for countries and their investors if trouble arose, the shadow committee said.