Cut in Interest Rates Said Likely

Wednesday, December 20th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) â€” The Federal Reserve's new policy â€” focused on the rapidly slowing economy and making sure it doesn't stall â€” is prompting economists to predict that an interest rate cut is likely in January.

Fed Chairman Alan Greenspan and his colleagues announced a dramatic shift of focus Tuesday away from fighting inflation through higher interest rates to worrying about the threat of a recession.

``Their statement indicates a 180 degree about-face in terms of their view of the risks facing the economy,'' said First Union chief economist David Orr.

For the first time in two years, the Fed said it perceived the balance of risks to the nation's economy were ``weighted mainly toward conditions that may generate economic weakness in the foreseeable future.''

Previously, the Fed has viewed inflation as the biggest threat to the economy, now in its longest-ever streak of uninterrupted growth.

The economy slowed significantly in the third quarter, growing at an annual rate of 2.4 percent, down from 5.6 percent in the second quarter, causing some analysts to worry whether the economy was slowing too much, too soon.

In its statement, the Fed cited a long list of economic threats including ``the drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings and stress in some segments of the financial markets.''

Against this backdrop of concerns, many economists believe Fed policy-makers will cut interest rates by a quarter point at their next meeting Jan. 30-31. That could be followed up with another rate cut at the March meeting, with additional rate decreases after that depending on the state of the economy, analysts said.

``I think the Fed is fearful the economy will continue to erode and businesses and consumers will lose confidence and retrench in their investment,'' said Mark Zandi, chief economist with Economy.com, a consulting firm.

Wall Street investors and others, including Jerry Jasinowski, president of the National Association of Manufacturers, whose members have been particularly feeling the effects of the economic slowdown, were disappointed the Fed didn't slice interest rates Tuesday. Instead, the Fed left short-term interest rates unchanged.

Some analysts said expectations for an immediate rate cut were unrealistic.

``There may be a looming recession on Wall Street, but on Main Street conditions have not deteriorated sharply,'' said economist Joel Naroff of Naroff Economic Advisors. ``Job growth has slowed, not collapsed. Spending has slowed, not collapsed. Income growth has slowed, not collapsed.''

Between June 1999 and May of this year, the Fed boosted interest rates six times in a move to slow the high-flying economy enough to keep inflation under control, but not so much as to trigger a recession. Some analysts wondered whether the Fed will be able to engineer a soft landing for the economy.

Given the Fed's decision to leave rates unchanged, a key short-term interest rate controlled by the Fed called the federal funds rate will stay at 6.5 percent. That means commercial banks' borrowing costs will also remain unchanged.

Banks' prime lending rate, the benchmark for millions of consumer and business loans, has been at a nine-year high of 9.5 percent since the Fed's last rate hike in May.

The Fed's policy shift came a day after Greenspan met with President-elect Bush and his running mate, Dick Cheney. Both men recently expressed concerns about the growing threats of a recession, saying this was a key reason Congress should pass Bush's $1.3 trillion tax-cut package.

In the past, Greenspan has opposed using projected federal surpluses to provide large tax cuts, saying he preferred that the surpluses be used to pay down the national debt.

Wells Fargo's chief economist Sung Won Sohn said the Fed's suggestion of future rate cuts ``is sending a signal to the Bush camp that monetary policy alone can prevent an economic downturn.''

Two weeks ago, Greenspan gave notice of a switch in Fed thinking with a speech to a banking conference. At that time, he said economic growth had slowed ``appreciably'' and warned that policy-makers had to be especially alert to the risks posed by unexpected shocks such as a sudden surge in energy prices or a big drop in the stock market.

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On the Net: Federal Reserve: http://www.federalreserve.gov