Fed Expected To Stand Pat On Rates Some Say Next Reduction Could Be A Long Time Coming

Federal Reserve Chairman Alan Greenspan’s bullish view of economic prospects has convinced most analysts that the Fed will not cut interest rates when its policy-makers meet this week.

And some economists are beginning to forecast that the central bank is finished reducing rate altogether, which would be disappointing news to the millions of American consumers and businesses whose borrowing costs are linked to Fed interest rates.

The central bank’s chief policy-making group, the Federal Open Market Committee, will meet behind closed doors Tuesday to decide on its next moves.

Analysts agree the committee will not cut rates this week, especially after Greenspan’s optimistic review of current conditions, delivered last Friday to the Senate Banking Committee.

Greenspan declared that “near-term prospects for the U.S. economy have improved” following a near-stall last spring. He noted that unemployment has edged down, housing sales have rebounded and even the troubled manufacturing sector recorded a sizable jump in production in August.

That view was bolstered further on Monday with a report that sales of existing homes jumped 3 percent in August to a 15-month high.

“The soft landing is here and the Fed is pretty happy with the way things are right now,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “They see no need to lower interest rates.”

But analysts are split on what the committee will do at its last two meetings of the year, on Nov. 15 and Dec. 19. While some economists said they were still looking for rate cuts later in the year, others said they believed the central bank has accomplished its goals with the single rate reduction and will not push rates down further.

At their July 6 meeting, the Fed cut the federal funds rate for the first time in nearly three years, reducing the target rate for the interest that banks charge each other for overnight loans from 6 percent down to 5.75 percent.

Banks’ prime lending rate, the benchmark rate for millions of consumer and business loans, declined by a quarter-point as well to 8.75 percent. Analysts noted that this time a year ago, the central bank was in the midst of a string of seven rate increases designed to slow a booming economy before inflation got out of hand.

The rate cut two months ago came after Fed officials became worried that they might have overdone the tightening and brought on a recession. But since that time, several signs have indicated the economy is rebounding and could be expanding at a 3 percent rate in the current quarter, far higher than the anemic 1.1 percent growth rate of this spring.

“Why shouldn’t they stop with just one rate cut? I would think that Fed officials have to be utterly happy with what is going on now,” said Lyle Gramley, a former Fed board member and now a consultant with the Mortgage Bankers Association.

David Jones, chief economist at Aubrey G. Lanston & Co., said he also believes the Fed may be content to leave interest rates unchanged for a considerable period of time.

“Greenspan appears close to victory. There will certainly be no more rate cuts this year and the Fed may be able to hold policy unchanged for some time,” he said.

A stand-pat policy would not please Democrats in Congress, who are worried about Clinton’s reelection chances without robust economic growth next year.

Also, the nation’s manufacturers have been pushing for lower rates, concerned that the slowdown in production has already cost thousands of jobs this year.

The board of directors of the National Association of Manufacturers has adopted a resolution urging the Fed to aim for economic growth in a range of 3 percent to 3.5 percent.

Fed policy-makers believe the economy can’t grow much faster than 2.5 percent without triggering higher inflation.