Magazine article American Banker

3 Economists Urge Cutting Fed Funds to 2%

Magazine article American Banker

3 Economists Urge Cutting Fed Funds to 2%

Article excerpt

Three prominent economists are urging the Federal Reserve to cut interest rates again.

At a House Budget Committee hearing Friday, Benjamin Friedman of Harvard University, Allen Sinai of the Boston Co., and Donald H. Straszheim of Merrill Lynch & Co. said the federal funds rate should go down.

While they lauded the Fed for earlier, though cautious, cuts in interest rates, the economists said those moves have been largely ineffective in spawning economic growth.

"The Federal Reserve is facing a hurricane,

V not just the head wind that Chairman [Alan] Greenspan has described," said Mr. Sinai, chief economist of the Boston Co., which is owned by American Express Co.'s Shearson Lehman Brothers. "With so many structural impediments to growth, the stimulative effects of easier money on the economy have been overwhelmed."

Mr. Sinai said a quick, sharp reduction in the fed funds rate, currently targeted at 3%, is necessary to reach a 2.5% annual rate of real economic growth.

Inflation Called No Danger

"A re-ignition of inflation would not occur even if the federal funds and discount rates were lowered by another percentage point," he said. "Instead, economic growth and demand would more likely be restored."

The economists said they recognized that the Fed may be reluctant to cut rates again, since such a move would be likely to depress the dollar in international currency markets. But the "continuing stagnation gripping our economy," as Mr. Friedman put it, should outweigh this fear.

"The inflationary consequence of a weak dollar is a small item when the inflation rate is low, as is the present case," Mr. Straszheim said.

Reliance Urged on Market

"More desirable than the current policy of settling the federal

V funds rate at levels not those of the market would be a freeing up of interest rates to whatever levels the demand and supply of funds would bring," he said. …

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