Magazine article American Banker

Succession of Rate Cuts in the Offing for '96, Many Economists Say

Magazine article American Banker

Succession of Rate Cuts in the Offing for '96, Many Economists Say

Article excerpt

The Federal Reserve let six months pass between interest rate cuts this year. That won't happen next year, according to several economists.

Indeed, bankers should brace for a string of rate cuts from the central bank to offset a softening economy and diminishing inflation.

After Tuesday's reduction - the first since last July - the Fed will cut again in January, do the same in the spring and then push the federal funds rate below 5% as early as next summer, according to NationsBank's Mickey D. Levy.

"The Fed needs to lower the funds rate to 5% just to achieve a neutral monetary policy," said Mr. Levy, chief financial economist at NationsBanc Capital Markets Inc., a subsidiary of the Charlotte, N.C.-based giant.

As he sees it, next year's biggest economic risk "is that the Fed overstays its restrictive stance and generates a slump."

Continuing its cautious approach, the central bank this week lowered its target for the funds rate, the overnight rate on interbank loans, to 5.5% from 5.75%. But it did not cut the discount rate, which remains at 5.25%

Philip Braverman, chief economist at DKB Securities Corp., New York, a unit of Japan's Dai-Ichi Kangyo Bank, expects "another hundred-basis-points reduction in the funds rate from here."

But he noted that "a 4.5% funds rate would amount to removing only half the (credit) tightening that the Fed put in place." From early 1994 to early 1995, the Fed doubled the rate to 6% from 3%.

"It will be a cautious and partial reversal of what I view as a inappropriately tight monetary policy, given the disinflationary trend we are experiencing," he said.

Mr. Braverman expects the inflation, as measured by the consumer price index, to drop to the 2% level next year. And, he noted, that index has been found to overstate inflation.

Two other better measures last year showed inflation already under 2% this year. …

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