The way Henry Kaufman sees it, the American economy is caught in the quicksand of slow economic growth. Only the Federal Reserve Board, with a quick interest-rate cut, can get the economy back on solid ground again. Dr. Kaufman, the chief economist at Salomon Brothers, and an interest-rate guru sometimes called ``Dr. Doom,'' expects the Federal Reserve Board will either act after Nov. 7, following the release of the October unemployment data, or in January.
``If the unemployment numbers are soggy, the Fed may well cut the discount rate in the month of November,'' Kaufman says. ``If not, then they will cut the rate in January,'' after the holiday hiring seasons ends.
Policymakers have little choice but to lower interest rates, Kaufman says. ``Considering the subnormal economic growth,'' he argues, ``the only way to limit the downside risk is for additional monetary expansion. We are in a setting domestically and internationally where fiscal policy [government spending] has been neutralized as a policy tool,'' as the federal government tries to cut the budget deficit.
The discount rate, the rate the Fed charges member banks, is currently at 5 percent. In a speech late last month, Kaufman suggested interest rates could drop 1 to 1 points as a ``prerequisite'' for launching the economy on a strong upward track. Shortly after Kaufman's speech, the stock and bond markets surged.
Kaufman has never been hesitant about making calls about the economy. Now he will have even more time to do so, because he resigned as vice-chairman of Salomon Brothers last week to spend all of his time as director of research. Kaufman joined Salomon Brothers in 1962.
The firm, in a management reorganization last week, formed a board of directors made up of 18 members. In the past, a management committee of nine had controlled the influential firm. John Gutfreund, Salomon Brother's chairman, indicated the change would allow younger executives to participate in running the publicly held company.
This change prompted Kaufman to resign as vice-chairman. In one of the first interviews since that move, he said he resigned because ``in view of the policy changes that had been made, I felt I would be much more effective in going back and concentrating full-time on research; I felt I could not be as effective under the new management in policy decisions. I felt it would be the correct thing for me to do to go back to an area I would have much more control over.'' Under the professorial Kaufman, research has expanded greatly. Today, there are professionals working in New York, London, and Tokyo, including 55 PhDs. In two or three years Kaufman expects 400 people in research. ``There are a whole host of client decisions, corporate finance decisions, and even trading decisions in which research is an integral part,'' he says. His speeches get wide circulation, because they sent to journalists as well as to 13,000 of Salomon Brothers' institutional clients.
Even though Kaufman may have less say in the management affairs of Salomon Brothers, he promises to continue to speak out on national and international financial and economic issues.
Lower interest rates would force the dollar to sag further unless the United States' trading partners, Japan and West Germany, were also to drop their lending rates. Paul Volcker, chairman of the Federal Reserve Board, has encouraged Germany, in particular, to stimulate its economy. And Secretary of the Treasury James Baker III has also stated his desire for overseas growth. Europeans, however, are hesitant to do this, and the United Kingdom on Tuesday raised rates in an attempt to prop up the pound sterling, following a month-long slide on foreign exchange markets.
Kaufman says he deeply concerned about the trend toward deregulation in financial markets and the growth of debt in the US and overseas.
He has long been critical of the budget deficits and was one of the first economists to detail and keep track of the off-the-books, as well as the official, debt of the federal government.
Even though he is widely watched, Kaufman is not always right. In 1982 when interest rates were dropping, he kept forecasting they would rise again. They did not, and Kaufman admits he was a little bit late.