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Economists Predict New Cut In Rates

Tue., Jan. 30, 1996

The Federal Reserve, which supplied a small dose of interest-rate relief in December, will provide more in an effort to combat a dramatic slowing of the economy, private analysts are convinced.

Many economists said they believed the next Fed interest rate reduction could come as soon as Wednesday at the end of a two-day meeting of the Federal Open Market Committee, the closed-door strategy sessions that Fed policy-makers hold eight times a year.

“The Fed has been looking for windows of opportunity to ease and there is one open right now because it is clear that the economy has slowed,” said Lyle Gramley, chief economic consultant with the Mortgage Bankers Association and a former Fed board member.

The central bank cut interest rates twice last year, once in July and then again in December, pushing its target for the federal funds rate, the interest that banks charge each other, from 6 percent down to 5.5 percent at the end of the year.

Both moves triggered corresponding quarter-point reductions in commercial banks’ prime lending rate, the benchmark for millions of business and consumer loans.

Analysts said if the Fed moves on Wednesday to trim the funds rate to 5.25 percent as they expect, it will push the prime rate down as well. It currently stands at 8.5 percent.

The Fed doubled the funds rate in seven moves from February 1994 to February 1995 in an effort to keep the economy from overheating and making inflation worse. That strategy did work to slow economic growth but now there are concerns that the economy may be weakening too much.

The overall economy, as measured by a newly revised gross domestic product, showed total output growing at an annual rate of 3.2 percent in the July-September quarter of last year. However, many economists believe that GDP growth slowed to around 2 percent in the October-December quarter and has now slowed even further, to around 1 percent.

A survey released Monday by the National Association of Business Economists found 67 percent expecting sluggish growth over the next six months. The NABE survey was more pessimistic than one taken three months ago, and some economists are concerned that with growth slowing so much, some unexpected event could tip the country into a downturn.

Tags: statistics

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