Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Jun 30 1992 Date: Tue, 30 Jun 92 05:22:40 EDT Message-ID: 06-30 0000 BONUS: Many economists urge rate cut USA TODAY Update June 30, 1992 Source: USA TODAY:Gannett National Information Network At 2:30 p.m. Tuesday in Washington, in a quiet, cavernous room, 18 men and a woman will gather for one of the summer's most important meetings. The 19 members of the Federal Open Market Committee, the Federal Reserve Board's policymaking arm, will try to figure out what's wrong with the economy and whether it needs their help. HOW LONG WILL THEY MEET? They'll sit in straight-backed chairs around a mahogany conference table bigger than most living rooms. The lights will be so low it will feel like evening at midday. In that hushed room on the second floor of the Marriner S. Eccles Federal Reserve Board Building, the Fed committee members will likely debate into the early evening. A second session will begin at 9 a.m. ET Wednesday. WHAT WILL THEY TALK ABOUT? At issue is whether the Fed should push down short-term interest rates for the 23rd time in three years - in yet another bid to get the economy out of first gear and up to cruising speed by encouraging consumers and business to borrow and then spend. A growing number of economists - looking at dismal home-sales reports and sluggish consumer spending, while inflation seems to remain under control - believe the Fed will give rates that 23rd push. WHAT DOES BUSH WANT THE FED TO DO? President Bush, facing a tough re-election campaign and remembering what happened last year when consumer confidence, personal spending and manufacturing picked up in the spring only to stall in the fall, says the Fed should push rates lower. Last week he turned up the political heat, saying, "I'd like to see another lowering of interest rates." That's about as direct as the president has ever been in expressing his impatience with the Fed. WHAT DO ECONOMISTS SAY? Many economists, also worried that this year could turn out to be a repeat of last year's fizzle, say the Fed should give interest rates another downward shove. "There's a real chance we're going to get `deja vu all over again,' as Yogi Berra said," says James Annable, chief economist at First National Bank of Chicago. "I'd go ahead and cut (rates)." His argument was buttressed Monday by word from the Commerce Department that sales of new homes plunged 5.6% in May from April, a fourth straight drop. WHAT DOES GREENSPAN THINK? Published reports say several FOMC members, including Fed Chairman Alan Greenspan and Fed governors Lawrence Lindsey, David Mullins and Susan Phillips, favor another downward push on rates. The FOMC is made up of the 12 presidents of the Fed's district banks and the seven members of the Fed's Washington-based board of governors. At meetings, the seven governors and the president of the New York district bank always vote. Four other votes rotate among the 11 remaining bank presidents. IS THE PLAN UNANIMOUS? Not all FOMC members apparently agree that rates need to drop. Among the committee members who reportedly believe further easing isn't necessary and might lead to growth so strong that it could push inflation higher next year: Jerry Jordan, president of the Federal Reserve Bank of Cleveland; and governors Wayne Angell and John LaWare. WHAT SHOULD THE FED DO? Also on that side of the rates debate are outside experts such as Lyle Gramley, chief economist at the Mortgage Bankers Association of America and a former Fed governor from late in the Carter administration through the early Reagan years. He's not so sure the Fed needs to push down rates. "If they let themselves be yo-yoed around by every month's economic numbers," Gramley says, "the nation would not be well-served. The Fed needs to look through all these numbers we're seeing to the real trends." WHAT DOES GRAMLEY EXPECT IN THE THIRD QUARTER? The trend Gramley sees is an economy that picked up speed the first quarter thanks to low mortgage rates and warm weather. That sparked home sales and encouraged consumers to get out and do their shopping then instead of later. Then, in March and April, mortgage rates were higher and the weather turned more normal. "And just as we should have expected, the economy softened," says Gramley. Now, he predicts, the third quarter will be stronger than the second as spending naturally picks up after the three-month breather. WHAT WILL THE FOMC DECIDE TO DO? We won't know for sure for about six weeks - when the Fed finally releases minutes of this week's closed-door meetings. But something tantamount to an announcement could come as soon as Thursday, some economists say, if June employment figures due for release at 8:30 a.m. ET show an economy still struggling to create jobs. WHAT ROLE WILL THE EMPLOYMENT FIGURES PLAY? "If the numbers come in and we see additions of 100,000 or more (to payroll employment), then I don't think the Fed will ease," says Veronika White, economist at First Fidelity Bancorp. But, "if the number is 50,000 or less, there's a strong possibility" the Fed will ease (rates). That would be a sign the FOMC voted to give Greenspan the authority to act if he thinks the economy is weakening. Most likely, the Fed would add enough money to the banking system to lower the federal funds rate - what banks charge each other for overnight loans - to 3.5% from 3.75%. IS A RATE CUT EXPECTED? The odds of a rate cut Thursday may not be high. Economists believe the economy added 95,000 jobs last month, perhaps enough to persuade the Fed not to push rates down - yet. Even assuming the FOMC does what many economists say it will - and gives Greenspan the go-ahead to act if the economy is weak - Thursday might be too soon to look for lower rates. Bush, some Fed watchers say, may have inadvertently postponed a Fed rate cut when he publicly called for lower rates. COULD POLITICAL PRESSURE BACKFIRE? "If they lower rates (now), there will be a presumption among some people that they're caving in" to political pressure, says Norman Robertson, chief economist at Mellon Bank in Pittsburgh. And that is an image the Fed wants to avoid at all costs, economists say, because it could spook bond traders. If bond traders conclude the Fed has abandoned its non-partisan fight against inflation, they might drive long-term interest rates higher to protect the value of their investments against rising prices. SOME HOPE FOR BIG MOVE? To really grab headlines and give consumer confidence a boost, some economists say, the Fed might do something more dramatic than just shave a quarter point off the federal funds rate. They say there could be a dramatic move. Sung Won Sohn, chief economist at Norwest in Minneapolis, is among those who hope the Fed makes a bold move. Last week, he and other top bank economists advised Fed officials "to cut the discount rate and the funds rate immediately," Sohn says. Bonus Editor: Ed Kelleher. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM