Fed Tries to Cut Loan Rate Amid Recession Signs

The Federal Reserve Board, seeking to bolster the weakening economy, signaled its intention Friday to nudge interest rates down another quarter of a percentage point, as new reports showed that the economy continues to be buffeted by sharply rising oil prices.

In a widely expected step, the nation’s central bank sought to push the federal funds rate on interbank loans from the current 7.75% to 7.5%. The effort was stymied by an unexpected rash of heavy borrowing in the markets, but analysts said the Fed would try again next week.

The Fed’s action occurred as the government published new evidence that the oil price surge related to the Persian Gulf crisis continued to push the U.S. economy further toward recession in September and October as consumer prices soared and the nation posted another large monthly trade deficit.

Economists said there is little doubt that the combination of figures reported Friday added to earlier evidence that the economy has entered a recession.

“Recession is winning the day,” said Allen Sinai, chief economist of the Boston Company, a financial services firm in New York. “Oil prices are pushing up the consumer price index, but . . . recession is overweighing everything.”

Both the inflation and trade figures were bearish by any standard. Largely because of the jump in oil prices, the Labor Department’s monthly inflation index jumped by 0.6% in October, after increases of 0.8% in the two previous months. It was the worst three-month price rise since 1982.

Meanwhile, the trade deficit, bloated by high costs for imported oil, continued essentially unchanged at $9.41 billion in September, just slightly below the previous month’s high level of $9.73 billion.

Since Iraq invaded Kuwait, Americans’ cost of living has risen at an annual rate of 8.9%, nearly double the 4.6% rate for all of last year. Fuel oil prices have shot up more than 50% in the last three months, and gasoline prices have soared nearly 27%.

However, economists noted that the so-called “core” inflation rate--excluding volatile food and energy prices--rose by only 0.3%, signaling that the oil price hikes are not rippling through the rest of the economy as rapidly as some had feared.

Analysts said the action by the Fed was taken partly in response to Friday’s relatively modest rise in this core rate. The Fed’s policy-setting Federal Open Market Committee had met Tuesday and apparently decided to nudge interest rates down if inflation did not worsen.

Friday’s effort by the Fed was the second time in recent weeks that the central bank has sought to cut the federal funds rate on interbank loans by a quarter of a percentage point. Barely one month ago, the Fed pushed the rate down to 7.75%, from 8%, in response to congressional passage of the budget accord.

“The Fed signaled a desire to ease to 7.5%, but credit demand is too high to allow them to get there in a single afternoon,” said Alan Levenson, an economist and Fed analyst at the WEFA Group, an economic forecasting firm based in Bala-Cynwyd, Pa.

The action by the Fed was expected to ease tensions between the central bank and the White House, which has been pressuring Fed Chairman Alan Greenspan to cut rates to help avert a recession.

However, the Fed has been reluctant to ease interest rates as rapidly as the Bush Administration has wanted because of fear that the move might backfire and worsen inflation and possibly make it more difficult to attract foreign capital.

The $9.4-billion trade deficit reported for September was slightly better than the $9.7-billion deficit recorded in August, but it was essentially in line with the $9.3-billion red-ink figure reported for July.

Excluding oil exports and imports, the deficit was $3.8 billion, compared to $5 billion in August. In constant 1987 dollars, the September deficit was $7 billion, compared to $8.5 billion the previous month.

Mainly because of the surge in prices, oil imports soared by $1.4 billion to a new level of $6.2 billion, even though the total number of barrels imported was virtually unchanged.

The average cost per barrel was $24.31, compared to $17.31 in August.

Excluding petroleum, however, imports fell by $2 billion, as recession-wary importers sought to hold inventories down. Imports of consumer goods, automobiles and capital goods were lower, reflecting across-the-board retrenchment.

At the same time, exports declined for the second consecutive month, reflecting a slowdown in the economies of some of the major U.S. trading partners.

Exports fell to $31.8 billion in September, slightly lower than the $32.5 billion in August.

Analysts said the decline casts doubt on hopes by some economists that expanding exports will mitigate the recession.

Despite the bearishness of Friday’s reports, economists found one silver lining: If the economy falls into recession, it may help keep inflation in check.

Roger Brinner, economist at DRI-McGraw Hill, an economic forecasting firm based in Lexington, Mass., said that, if the slowdown proves to be as deep as some forecasters expect, “we’ll lock in a 3.5% annual rate” of inflation.

“But we expect unemployment at 7% by spring,” Brinner noted. “If that happens,” he said, Iraqi President Saddam Hussein “will have done the Fed’s work” in slowing the rate of inflation.

The slower core inflation rate reported Friday was widely regarded as another open door for the Fed to reduce interest rates another notch.

Analysts said they believe that the Fed’s move on Friday clearly marked an effort to cut rates.

The upward pressure in the inflation report was all from oil prices, save for one perennial exception: the cost of medical care, up 0.8%, and medical services, up 0.9%--areas that seem recession proof and impervious to any inflation-cutting strategies.

Gasoline prices rose 7.7% in the month and have risen 26.9% in the last three months and 36.9% so far this year.

The higher energy prices pushed transportation costs, public and private, up 2.1% for the month. Altogether, inflation is running at an annual rate of 6.7% so far this year--compared to a 4.7% rate through October, 1989.

Before seasonal adjustment, the consumer price index increased 0.8 of a point to 133.5, from a base of 100 in 1982-84. A cross section of goods and services costing $100 in the base period would have cost $133.50 last month.

Retail prices in the Los Angeles-Anaheim-Long Beach metropolitan area increased 0.7% in October, after a 1% increase in September. Consumer price inflation over the last 12 months stands at 6.7% in the metropolitan area, compared to 6.3% nationwide.