Quarter-Point Interest Rate Cut Expected

Wall Street is already looking past Tuesday’s meeting of the Federal Reserve Board’s interest-rate-setting Open Market Committee.

The central bank is all but expected to pare another quarter percentage point off its key short-term-rate target, which would lower it to 3.5%. The reduction would be the seventh straight cut, for a total of 3 percentage points, since the Fed began its current credit-easing campaign in January.

The real suspense surrounding the Fed concerns whether Chairman Alan Greenspan and his fellow governors will decide they’ve done enough to push the economy back into motion and will leave the rest up to business and consumers.

Economist Charles Kadlec of J&W; Seligman & Co. in New York, a persistent Fed critic, believes the central bank misread the danger of inflation last year and hit the brakes too hard, causing the current slowdown, which threatens to become a global recession.

Kadlec hopes the Fed keeps on cutting rates, but even more urgently, he wants it to keep pumping cash into circulation through its open-market activities, namely, purchasing Treasury securities.

“Far more important than getting [the interest-rate target] to 3% is meeting the demand for dollars,” Kadlec said.

In Kadlec’s view, the global economy is starving for dollars, which the Fed has been too slow to supply. The evidence, he said, is in the weakness of prices for commodities, including gold.

As of Friday, with the bond market rallying and the stock market slumping, Wall Street started building in a faint chance that the Fed would take more aggressive action and slice rates by half a percentage point, according to Michael Cloherty, bond strategist at CS First Boston.

Although he noted that slight bias on the market’s part, Cloherty said in almost the same breath that he doesn’t think a deeper cut than a quarter point is necessary.

The tax rebate checks now landing in Americans’ mailboxes, together with the Fed’s previous interest rate cuts, should be enough fuel to get the economy back up to speed, he said. Another factor favoring growth is the reduction in business inventories that has occurred over the last few months.

At some point, factories will have to start ramping up production again, which could mean a turnaround in the stream of layoffs that have been announced recently, Cloherty and other optimistic experts say.

Some even see a danger of a too-fast recovery.

Tuesday’s expected rate cut will be the last in the series, predicted Richard Yamarone, senior economist at Argus Research in New York.

The economy remains vulnerable to shocks, such as another spike in gasoline or electricity prices, but if such jolts can be avoided and consumers keep on spending at a brisk clip, “we’ll be back in party land” by early next year, he said.

In fact, the biggest threat ahead is that a “V-shaped” rebound will rekindle inflation and cause the Fed to start raising interest rates early next year, Yamarone said.

The stock market is famous for sniffing out economic recoveries six months or so before they arrive. But sometimes it picks up a wrong scent.

In early spring, when stock market indexes were staging a broad recovery, analysts predicted investors’ enthusiasm would be confirmed by a resurgence in corporate profits by the third quarter of this year, or the fourth quarter at latest.

Now it doesn’t look as if the earnings rebound will be arriving any time soon. Companies keep reducing their estimates of third- and fourth-quarter sales and profits, and they keep reducing their work forces too.

Ford Motor Co. and Accenture (formerly Andersen Consulting) joined the pink-slip parade last week, announcing layoffs of 5,000 and 1,500 employees, respectively.

Wall Street analysts expected earnings of the companies in the S&P; 500 to shrink 13.4% in the third quarter and fall 1.1% in the fourth quarter, according to research firm Thomson Financial/First Call. Those numbers contrast with a 6.3% drop in the third quarter and the 5.5% gain in the fourth quarter that were forecast at the start of July.

Richard D. Rippe, chief economist at Prudential Securities, said there is considerable lag time between the Fed’s rate cuts and their stimulative effects, so it may be that the economy is already on the mend.

It is a “critically valuable element” that inflation is nearly nonexistent, he said, because that gives the central bank extra flexibility to cut rates.

Some economists are less certain that a rebound is in the offing.

Little help can be expected from overseas because Japan appears headed back into recession and most of Europe is growing more slowly than the United States, such observers say.

Moreover, the stimulus from the tax rebate is likely to be short-lived, said Carol Stone, deputy chief economist at Nomura Securities International in New York.

Consumers surveyed by the University of Michigan last week said overwhelmingly that they would either save the money or use it to pay off debt, Stone noted. If so, the rebate will have a smaller stimulative effect than policymakers were hoping, she said.