Oh Where, Oh Where Will the Fed Go Next?

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IT'S nose-count time for Fed watchers.

In a fax sent to its financial clients this week, HSBC Securities Inc. listed United States Federal Reserve policymakers and guessed how they would stand on the idea of lowering interest rates when they next meet July 5-6.

Christopher Low, an economist with the New York brokerage house, admits that the exercise is a "dangerous pastime" because the assessment of how the 19 members of the Federal Open Market Committee (FOMC) will vote "is based on a significant amount of reading between the lines."

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After all, central bankers pride themselves on being ambiguous on future interest-rate policy. "If I say something which you understand fully in this regard, I probably made a mistake," Fed chairman Alan Greenspan reportedly told a senator Tuesday.

His remarks to the Senate Banking Committee were certainly unclear enough to leave the press confused. The headline for the Greenspan story in the Idaho Statesman in Boise stated: "Greenspan Predicts 'Modest' Recession." The headline in USA Today said, "Greenspan: Little Risk of Recession." Another newspaper's headline had Mr. Greenspan hinting at a cut in interest rates; yet another publication said a change was unlikely.

Mr. Low, after guessing the positions of the seven governors and 12 regional bank presidents on the FOMC, concludes that a decision remains a tossup. "Greenspan will cast the deciding vote," he says, "and that's the way I like it." Low trusts Greenspan's "instincts" on the economic situation.

Crucial to a Fed decision, Low says, will be such statistics as May orders for durable goods, released today, and June unemployment figures, released July 7, but available on a confidential basis to the FOMC July 6.

Low holds that the Fed should lower interest rates - a shift that could directly benefit such debtors as those with home-equity loans or outstanding credit-card balances and trim the earnings of such creditors as those with savings accounts or maturing certificates of deposit.

"If [Fed policymakers] don't ease, and it turns out we are going into a recession, then that is clearly a mistake," he says. If they do cut rates, and there is only a slowdown, the "pressures on prices are so small" it won't do much harm.

Low sees output in the US declining at a 1 percent to 2 percent annual rate after inflation in the current quarter. Greenspan told the Senate committee that growth in gross domestic product - the value of all goods and services - in the April-June quarter would be either "very low" or "marginally negative."

Nonetheless, apparently most Fed watchers in the financial community expect the Fed to take no action on interest rates. A survey of 22 financial economists last Friday by MMS International, economic analysts in Belmont, Calif., found only six expecting a rate cut in July. These six anticipate a small 0.25 percent drop in the federal funds rate - the rate commercial banks charge one another on overnight loans. And 11 of the 22 expect the FOMC to act at its August meeting, with six anticipating a 0.25 percent rate drop and five a 0.5 percent rate drop.

Oddly, investors themselves foresee the Fed trimming short-term rates 0.5 percent in July. This is reflected in bond and stock prices. If the Fed doesn't move or moves only 0.25 percent, these markets will be disappointed, says James Hale, an MMS economist. He expects the economy to bounce back modestly in the second half, making Fed easing less likely then.

Like most Fed watchers, Low follows every word of Fed policymakers. He concludes that three governors, Lawrence Lindsey, Alan Blinder, and Janet Yellin, will vote "yes" for an interest-rate cut. The latter two are appointees of President Clinton. Edward Kelley and Susan Phillips are likely to say "no," and Greenspan is a question mark, he says.

Among Fed presidents voting on the FOMC this year, Low figures Catherine Minehan from the Boston Fed will vote "yes," William McDonough of New York will go along with Greenspan's decision, and the remaining three (Michael Moskow of Chicago, Thomas Melzer of St. Louis, and Thomas Hoenig of Kansas City, Mo.) will say "no." Many of these decisions may reflect the relative prosperity of the Fed presidents' districts, Low indicates.

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