With Interest Rates Hitting a Low Point, Fed Watches Closely

By , Staff writer of The Christian Science Monitor

IN coming months, interest rates in the United States will not fall much farther than they already have, a growing number of economists predict.

At the very least, underlying fundamentals affecting the bond market - such as rising economic growth - are said to be working in favor of either slightly higher rates or a relatively steady rate structure that makes deep declines unlikely.

In its fall ``investor guide,'' Fortune magazine argues that the ``fundamentals for interest rates are changing.'' This view is becoming increasingly popular in the bond market.

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Today's report on third-quarter US economic growth is expected to be up substantially from the anemic 1.9 percent growth the second quarter - perhaps around 2.5 or 2.75 percent. In past weeks, the bond market has become jittery about higher growth. Prospects for a more vibrant economy have been nudging bond yields up while sending bond prices down.

Consumers who have to borrow funds to cover long-term purchases such as a house or car may be in for a rude awakening at some point in the next year, some experts say.

``Interest rates appear to have bottomed out, or are very close to doing so,'' says Cynthia Latta, an economist with DRI-McGraw Hill, an economic consulting firm in Lexington, Mass.

``We don't see much room for further steep declines in rates at this time,'' Ms. Latta adds. ``And if fourth-quarter economic growth turns out to be far stronger than expected, we could see a tightening in interest rates by the Federal Reserve Board.''

On Monday, yields on 30-year Treasury bonds rose to 6.05 percent from 5.97 percent Oct. 22. The yield has subsequently dipped slightly. The current yield is up from the 30-year bond's record-low of 5.79 percent, recorded Oct. 15.

`I THINK we've reached a low on short-term rates,'' says Robert Eggert, who publishes Blue Chip Economic Indicators, a monthly economic review in Sedona, Ariz. ``But if inflation remains steady, which I think will be the case, then we could see a further drop in long-term rates of about one-half [of a] percentage point.''

In Mr. Eggert's latest poll, 50 blue-chip economists predicted that the average rate on 30-month Treasury bills will be around 3.0 percent for 1993, rising slightly to 3.4 percent in 1994. For long-term Triple A rated corporate bonds, the average for 1993 will be about 7.2 percent, falling slightly to 7.0 percent in 1994.

The Federal Reserve Board will ``be watching movements on short-term rates very closely,'' Eggert says. If there is any sign of upward momentum, the Fed will move quickly to tighten rates, he adds.

``Rates are in a bottoming arena now, but the bottoming could be spread out for many months,'' says Arnold Kaufman, editor of The Outlook, a monthly review published by Standard & Poor's Corporation.

``We see the range for long-term bonds as between 5.75 percent and 6.25 percent,'' Mr. Kaufman says. ``We are about midpoint on that range now.... We don't see room for a lot of further decline.''

Not all economists say that rates will hold steady or move up. ``Long-term rates will hit 5 percent - I repeat, 5 percent - within the next six months,'' insists Robert Parks, professor of finance at Pace University and president of Robert H. Parks Associates, an investment counseling firm. Dr. Parks argues that current US monetary and fiscal policy is overly restrictive and that interest rates will be forced to decline to reflect future slow national economic growth.

The bond market reacted to last week's cuts in interest rates in Europe and the US with quick unease, based on a perception that the cuts could help stimulate economic activity. In Europe, the German Bundesbank led off with an unexpected round of rate cuts; in the US, Morgan Guaranty Trust reduced its prime lending rate, though few banks followed its lead.

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