THE Federal Reserve Board met last week to decide short-term monetary policy. By the end of the week, it seemed clear the Fed was content to keep interest rates at their current levels. Economists and Fed watchers are now convinced, however, that the next move by the nation's central bank will be to nudge rates lower.
``I don't have any doubts the next policy is one of ease,'' says Lyle Gramley, chief economist at the Mortgage Bankers Association.
But Mr. Gramley says the Fed will be subtle when it actually moves and will probably wait until the May Consumer and Producer Price Indexes are reported. ``They don't want to reawaken inflationary fears in financial markets,'' says Gramley, a former Fed governor.
But economist Robert Barbera, of Shearson Lehman Hutton Inc., believes that the Fed may be too cautious. ``If they wait for the inflation numbers, it could be too late,'' he says, since these numbers are lagging indicators. Mr. Barbera believes the leading indicators of future economic activity ``are screaming that the Fed should aggressively ease.''
The Fed caution comes against a shifting economic landscape.
The US dollar has been soaring against both Japanese and European currencies. Government officials are fearful the strong dollar will hurt US exporters at a time when the trade deficit still remains high. But official intervention has had little, if any, impact. ``It's embarrassing. They would be better off not doing anything,'' said one Wall Street trader last Thursday as he watched the dollar rise while the Federal Reserve Board tried to halt the climb.
Dan Seto, an economist at Nikko Securities, says the ineffectiveness ``leads to the question, how much cooperation is there among the members of the G-7.'' The G-7 is composed of the major industrialized countries who meet regularly to synchronize their economic and monetary policies.
Gramley says it is certain Fed chairman Alan Greenspan has been talking to his counterparts at the Bank of Japan and the Bundesbank. ``It is logical to think the Japanese might increase their discount rate,'' Gramley says. If Germany also hiked its rate, Gramley says it would be an important signal to the foreign exchange traders ``that the party is going to end.''
The credit markets in the US are already anticipating some of these moves. After peaking in late March, short-term interest rates have fallen nearly a full percentage point. Three-month Treasury bill rates, which were over 9 percent in late March, are now closer to 8 percent. This decline in rates has been less pronounced in long-term rates. Mortgage rates, for example, have only eased about one-quarter to one-half of a percentage point.
William Sullivan, a money market economist at Dean Witter Reynolds, says the Fed is more skeptical than the credit markets that the US economy is slowing down. Certainly the Fed received no comfort last Wednesday when the government reported the nation's trade deficit had narrowed as exports grew at a 7.4 percent rate. ``The Fed has to decide if the economy is cooling, or is in a lull,'' Mr. Sullivan says.
This week, the Fed will get more evidence when the government reports the April durable goods orders which economists believe will rise 0.5 percent. On Wednesday, the Detroit automakers will report auto sales and Friday the government releases the April personal income figures.
Peter Greenbaum, an economist at Smith Barney, Harris, Upham & Co., estimates personal income will rise by 0.7 percent, reflecting a longer workweek and higher wages in April. ``This is indicative of the underlying strong wage growth,'' he says. On June 2 the government releases the May unemployment figures which will give an indication of how many more workers enjoyed the higher wages.
Sullivan says he believes the signs may point to an economy that is a ``touch stronger'' in April. The big question is whether the economic pulse will remain strong. If it does, the conventional wisdom on interest rates may be in for a surprise.