High Hopes for Lower Rates
Fed unlikely to cut interest rates next week, but home owners may see lower mortgage rates by spring.
BOSTON — This was supposed to be a year of rising interest rates - eventually. Once the East Asia crisis calmed down, many on Wall Street expected Federal Reserve policymakers to counter rising wages and any other signs of resurgent inflation.
In fact, views are shifting. When the Federal Open Market Committee meets next week, it is now expected to do nothing.
But just wait. Americans with home equity and car loans can anticipate slightly lower interest rates as soon as this spring, say a growing chorus of economists.
"In three or four months, the Fed will end up cutting rates," says Robert Parks, a Wall Street economic consultant. He expects global deflationary forces to become more visible in the US.
With the East Asia crisis expected to slow down the United States economy, the threat of war with Iraq, and the troubles at the White House, any interest rate hike has been put on hold. Analysts say the governors and Fed branch presidents that make up the Federal Open Market Committee will want to lay low and not add to the excitement.
As always, Fed watchers will be listening for hints of any policy shift on Thursday, Jan. 29, when Chairman Alan Greenspan testifies before Congress.
But as of last Friday, Jan. 23, 19 of 21 Fed watchers surveyed by Standard & Poor's MMS in New York predicted "no change" in short-term rates.
Bruce Steinberg, chief economist of Merrill Lynch & Co., New York, has just devised a model of the economy designed to predict Fed interest-rate changes, and it sees no shift in monetary policy next week. But he too forecasts lower rates later in 1998.
A few economists even expect the Fed to ease interest rates as soon as next week.
Irwin Kellner, an economic consultant based at Hofstra University, Hempstead, N.Y., says the Fed will cut the Federal funds rate - the interest banks charge on overnight loans to each other - by 0.25 percentage points to 5.25 percent next week. And he sees a similar cut later.
At the other end of the interest-rate policy spectrum, MMS economist Michael Englund expects the Fed to raise rates once the east Asia crisis has quieted down for some weeks.
Higher wage costs will force the Fed to return to its anti-inflation mode, he says. "It is only a matter of time."
But both Messrs. Kellner and Englund are outside the consensus of economists predicting no interest-rate action.
In a survey earlier this month, the average of 50 economists puts short-term rates only slightly lower this year than last - 5.1 percent for Treasury bills vs. 5.3 percent, according to Blue Chip Economic Indicators, Sedona, Ariz.
ONE factor that could alter the scene would be a worsening of the Asian crisis. Nations might then start selling their holdings of US Treasury securities to raise funds to make payments on loans denominated in dollars held by banks and companies, says Michael Cosgrove, an economist at the University of Dallas.
Japan, South Korea, Taiwan, Singapore, China, and Thailand together hold $500 billion of the $1.3 trillion of Treasury securities held by foreigners. If these securities were dumped on the market, it would raise interest rates and knock the US stock market for a loop, he says.
That danger, Mr. Cosgrove says, is one reason why US Treasury officials have urged Japan to give its laggard economy a bigger boost and other Asian nations not to default on their foreign loans.
The alleged sex scandal in the White House gave Wall Street a mild shock last week. Interest rates rose a little. Then they came down again a bit Monday.
The trouble may distract President Clinton, preventing him from coordinating joint action with other Group of Seven industrial nations to stimulate the world economy, Cosgrove figures.