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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (21459)	11/17/1998 8:28:00 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

Top News Tue, 17 Nov 1998, 8:23am EST U.S. Fed to Cut Overnight Lending Rate By Quarter Point, Economists Say Washington, Nov. 17 (Bloomberg) -- Federal Reserve policy- makers are expected to cut the overnight bank lending rate for a third time this year in an attempt to insulate the U.S. economy from destabilized global financial markets. Of Wall Street's 32 primary dealers, the banks and securities firms that deal directly with the Fed's trading desk, 28 expect the Fed to lower interest rates at today's meeting. Three foresee no change. One -- Zions First National Bank, which last week forecast a rate cut -- couldn't be reached for comment in yesterday's Bloomberg News survey. While most economists expect the Fed to reduce the overnight bank rate by a quarter point to 4.75 percent, they say it's a close call. Financial market conditions haven't completely stabilized, even though some companies have been able to raise money in the bond market. At the same time, the latest figures on the economy have shown surprising strength. ''The Fed will cut, but it's not a slam dunk,'' said Allen Sinai, chief global economist at Primark Decision Economics in New York. ''The overwhelming reason to me why they go is that the stakes are too high if they don't. We cannot allow the U.S. economy to go down significantly because that will hurt the rest of the world, which has already slowed down.'' If expectations prove correct and the Fed does cut rates, it would be third reduction in less than two months. Fed Chairman Alan Greenspan ordered an interest rate cut between official policy meetings on Oct. 15 and the policy-setting Federal Open Market Committee cut rates on Sept. 29. When the Fed acted last month, it cited a ''growing caution by lenders'' and ''unsettled conditions in financial markets'' as having the potential to slow U.S. economic growth. The widening of U.S. credit spreads is a concern for the Fed because if it persists, it makes it more expensive -- and more difficult -- for companies to finance growth. Room to Cut The Fed has leeway to cut interest rates because inflation is tame. Consumer prices rose by a 1.4 percent annual rate in the first nine months of 1998, down from a 1.8 percent annualized increase in the first nine months of 1997. Inflation has stayed benign as weakening economies in Asia depressed commodity prices and the cost of imported goods. That, along with some risk aversion in the credit markets, gives the Fed enough cover to lower borrowing costs with little risk of re-igniting inflation, allowing it to avoid disappointing those investors still counting on further rate reductions. The FOMC has one more meeting this year, on Dec. 22. ''From the Fed's perspective, while the data have looked strong recently, credit markets still haven't thawed out,'' said Joseph Abate, money market economist at Lehman Brothers in New York. ''Spreads are still at relatively high levels.'' For example, the difference between the average rate on 10- year corporate bonds and the 10-year Treasury note stood at 116 basis points late last week. While that's below the 125 basis- point spread from mid-October, it's well above the 80 to 90 basis point difference central bankers would like to see. Stabilizing Markets A rate cut also would help stabilize international markets by making it cheaper to borrow and keeping the fallout from overseas turmoil from pushing the U.S. toward recession next year. Since monetary policy acts with a lag of up to 18 months, Fed officials must base their decisions on expectations of economic conditions to come. Greenspan said last month that while the U.S. economy has ''fairly significant continued momentum,'' growth prospects have weakened measurably since Russia defaulted on its debt in August. If the Fed does act, it would lead to lower borrowing costs for consumers. Banks usually follow Fed actions by changing the prime rate, a yardstick against which consumer and corporate loans are measured. The prime rate, currently at 8.0 percent, should fall by a quarter point. In the months to come, the Fed could leave interest rates alone, assuming the economy continues to display signs of strength. Auto Sales Gain U.S. automakers saw their second best month of the decade in October, and overall retail sales rose last month at the fastest pace in five months. Fed officials keep a close watch on consumer spending because it makes up two-thirds of economic activity. ''The most likely scenario is one more move and then it's a wait-and-see situation for a while,'' said Joshua Feinman, economist at Bankers Trust Co. in New York. ''My nickel says the next move is more likely to be higher than lower because the economy will stay stronger than the Fed would like to see it.'' While expecting the Fed to cut the overnight bank rate today, economists are divided on the central bank's next move. Of the 32 dealers, 27 expect the next policy action to be a fourth rate cut and four say the next move will be to raise them. That's a change from last week, when none of the economists foresaw rates rising. Last week Zions said it expected a rate cut next. After today, the policy-setting FOMC has one more meeting this year, on Dec. 22.