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To: bob oserin who wrote (8736)	11/1/1998 2:01:00 PM
From: airborn	Read Replies (2) \| Respond to of 10786

Some food for thought: Friday October 30, 4:09 pm Eastern Time INTERVIEW-Y2K fears to fuel 2-pct fed funds rate By Scott Gerlach NEW YORK, Oct 30 (Reuters) - The Federal Reserve will steadily cut U.S. interest rates through 1999 to ease borrowing costs for businesses trying to solve their millennium bug problems, an investment strategist said Friday. Rob Schumacher, a strategist at Van Kampen Funds, said he expects the Fed to cut the federal funds rate, the rate banks charge each other for overnight loans, to 2.00 percent by the third quarter of next year. It currently stands at 5.00 percent. U.S. banks have restricted lending to all but the highest quality borrowers amid the current crisis wracking economies around the globe, Schumacher said, pointing to a recent Fed report saying credit had become more restrictive. Further rate cuts are needed to encourage banks to lend to companies striving to fix their computers before the new century, he said. ''As a result of Southeast Asia, Russia, Latin America and Long-Term Capital Management happening all at the same time, credit spreads have exploded,'' Schumacher told Reuters. Without steady rate cuts, ''the capital to resolve this problem is not going to be available,'' the strategist said. Estimates vary, but U.S. businesses are expected to spend upward of $50 billion to address the millennium bug, the design flaw that prevents some computer systems from correctly recognizing dates after Dec. 31, 1999. Under normal circumstances, Schumacher said, firms would have three choices about how to proceed: 1) allocate a portion of earnings for use in repair work; 2) spend profits to fix the problem or 3) borrow. The financial turmoil abroad will limit earnings and profits available for the task, Schumacher said, and ''right now, the borrowing part of the equation is not available.'' Because of the work needing to be done on the year 2000 problem, the liquidity situation now requires the same kind of attention the savings and loan crisis demanded in the early 1990s, he said. In order to head off the credit crunch that followed the widespread S&L failures, the central bank eased monetary policy steadily over the space of three years. ''If we follow the pattern of what it took to re-liquify the banks, then we need to bring the federal funds rate down to the level of inflation to encourage banks to lend,'' Schumacher said. Fed funds at 2.00 percent would approximate the current inflation rate and virtually erase banks' money costs, he said. The strategist said the Fed, which lowered the funds rate twice in late September and early October, will continue cutting rates despite recent economic data suggesting less of a slowdown than economists had expected. Data released on Friday showed that gross domestic product (GDP) growth accelerated to a 3.3-percent annual pace in the third quarter from 1.8 percent in the second quarter. Economists polled by Reuters had expected a 2.1-percent growth rate. Other recent reports on durable goods orders and employment costs also showed surprising strength. But monetary policy must focus on economic performance 12 to 18 months ahead, Schumacher said. Congress has approved little government spending to correct the year 2000 problem, so without Fed attention, it could hammer share prices, eroding consumer wealth and possibly provoking recession, he said. ''It is an economic event that is going to happen,'' Schumacher said of the millennium bug. ''Because it is going to happen, the money has to come from somewhere.''