Interest Rates: Down Next Week?

RICHARD SYRON has joined the crowd: he expects an economic slump in the United States. ``I don't see a severe or calamitous decline,'' says the president of the Federal Reserve Bank of Boston. In an interview, he predicted growth will be close to zero or slightly negative during this quarter and the first quarter of 1990.

Mr. Syron likely has considerable company among the seven Federal Reserve Board governors and the 12 presidents of regional Fed branches that sit on the central bank's policy-making body, the Open Market Committee (FOMC).

Washington Post correspondent John Berry reported that the FOMC agreed at its meeting Oct. 2 to cut short-term interest rates slightly in response to a budget agreement. But the policymakers balked at committing themselves to another cut to counteract any further deterioration in the economy.

Grumbling about leaks from the super-secret FOMC meetings, Syron didn't confirm or deny the Post story. But assuming Mr. Berry has a reliable source and that Congress reaches a compromise with the Bush administration on a budget package late this weekend, the Fed could lower interest rates next week.

It probably will reduce the Federal Funds rate, the interest commercial banks charge each other on overnight loans, by a quarter of a percentage point. That rate was pushed down the same amount to 8 percent in mid-July. At 7.75 percent, the Fed Funds rate is about 0.75 percentage points down from a year earlier. Other short-term rates, such as those paid on Treasury bills, tend to track the Federal Funds rate.

``Things are softer than I had expected, to be honest with you,'' says Syron. ``My own forecast three or four months ago was wrong.''

But he agrees with Fed Chairman Alan Greenspan that the economy is not ``deteriorating in a cumulating process.'' Mr. Greenspan used that phrase in testimony to the Joint Economic Committee of Congress Sept. 19. Greenspan said that a recession meeting the common definition of six months or more of declining national output might not prompt a vigorous monetary response from the Fed. A shallow downturn in gross national product (GNP) ``can very readily be revised away'' when these statistics are updated, the Fed chairman noted.

The Fed will get a further indication of the nature of the slowdown Tuesday when the Department of Commerce releases its first crack at GNP numbers for the quarter that ended Sept. 30. If the figures are decidedly negative, Fed policymakers will be tempted to be less cautious in reducing interest rates.

The Bush administration would certainly like the Fed to give the economy a monetary shove. Such action would be too late to help Republicans much in the November congressional elections. But the administration sees easier money as reducing the danger of a slump so deep that it prompts even more business bankruptcies, exacerbates banking troubles, and seriously worsens the budget deficit. President Bush undoubtedly would be delighted if the economy was well into a recovery by the time he faces reelection in 1992.

Indeed, there is some speculation that if the Fed has been too tight and the economy does sink into a bad recession, Bush will not reappoint Greenspan as chairman when his term expires next August.

Syron is not one of the five bank presidents voting on the FOMC this year. But his economic concerns, voiced at those meetings, are probably shared by many others in the room.

The biggest concern is inflation. ``It is worrisome to say the least,'' Syron says. ``Even before Saddam [Iraqi President Saddam Hussein] we had pretty disappointing price performance.'' The jump in oil prices, he notes, has already worked itself into the cost of many energy-dependent products. He is worried that the surge in inflation will lead to higher wage settlements.

If bond buyers believe the Fed is turning soft on inflation, they could insist on higher - not lower - long-term interest rates. ``The Fed doesn't have much control over long-term rates,'' says Syron. Similarly, the US dollar could drop dramatically, pushing up import prices and adding to inflation.

``The time is fairly pivotal for the national economy,'' says Syron.

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