Economists Guess As Fed Meets Despite A Slowing Economy And Strong Stock Market, Some Analysts Still Worry About Interest Rates

Wall Street has been positively giddy of late because of a growing belief that the Federal Reserve has finished raising interest rates. Stocks hit another record high Monday, but many private economists said the euphoria may be premature.

The view that the Fed has achieved its hoped-for “soft landing” helped to spur rallies in stock and bond markets in advance of today’s closed-door meeting of Fed policy-makers.

The markets believe widespread signs of an economic slowdown could make the Fed’s February rate increase, the seventh in a year, the last. There was more evidence of a slowdown Monday with a report that sales of existing homes plunged 5 percent in February.

This added evidence of a slowdown helped push the Dow Jones industrial average to a new high of 4,157.34, a gain of 18.67 points. Monday’s increase followed a 50.84 gain on Friday.

Heavy demand for bonds helped push the rate on Treasury’s benchmark 30-year bond to a ninemonth low of 7.31 percent, down sharply from a November high of 8.18 percent.

But many private economists, while not looking for a rate increase this week, said recent signs of weakness in interest-sensitive sectors such as home sales could represent only a pause that will be followed by renewed strength.

“The Fed is patting itself on the back right now. Policy-makers think the soft landing is at hand, but I think they are premature. I am looking for a pause and then a rebound,” said David Jones, an economist at Aubrey G. Lanston & Co.

Jones and other analysts predicted the Fed would remain on the sidelines at this meeting but could resume raising rates at its next session of the Federal Open Market Committee May 23.

“The conventional wisdom is that interest rates aren’t going any higher, but I believe there will be a snap-back in consumer spending that will keep the economy growing at a faster pace than the Fed’s target for sustainable growth,” said Eugene Sherman, chief economist at M.A. Schapiro & Co. in New York.

Not all economists agreed with this rising-rate scenario. Some said they believe the economy is slowing to a pace that will keep inflation under control and thus allow the central bank to stay on the sidelines.

The most optimistic are even forecasting that the Fed could start cutting interest rates either late this year or early in 1996.