Experts Split on Whether Fed Will Cut Rates Again

The stock market has enough to worry about. But now it may have to face the possibility that the Federal Reserve is finished cutting interest rates.

Economists at major Treasury bond dealers are divided on whether the central bank will cut rates next month for an eighth time this year.

Fourteen of the 25 firms, or nearly 60%, say the Fed will lower its main short-term rate again, according to a Bloomberg News survey Wednesday of economists at primary dealers. The other 11 say the Fed will leave rates alone.

The number of dealers doubtful about a Fed cut is well above the number that was doubtful about additional cuts in much of spring and summer.

The Fed has slashed its target for the federal funds rate, the overnight loan rate among banks, from 6.5% at the start of the year to 3.5% now. The last reduction was Aug. 21, when the Fed cut the rate from 3.75% to 3.5%.

Economists who expect Fed policymakers to lower the rate again when they meet Oct. 2 believe Chairman Alan Greenspan and his peers still fear the possibility of recession more than the possibility that low rates eventually will stoke inflation.

“Think of it as some insurance” against recession, said Merrill Lynch & Co. economist Gerald Cohen. Merrill, which had forecast that the Fed would stand pat Oct. 2, changed its view Wednesday, deciding the Fed would lack enough proof of an economic recovery to halt its rate-cutting campaign.

Most economists who expect another rate cut figure the Fed will reduce its key rate a quarter point, to 3.25%.

Those firms that expect the central bank to stand pat in October include Goldman Sachs & Co. and Morgan Stanley Dean Witter & Co. They say consumer spending has held up surprisingly well, even if it isn’t exactly robust. They also note some signs of improvement in important sectors of the economy, especially manufacturing.

“Manufacturing has been the key area of weakness in the economy, so any signs of stabilization may make the Fed think that it’s done enough,” said Jeff Thredgold, economist at Zions First National Bank in Salt Lake City.

More economic data are due today: the government’s report on August employment trends.

Cary Leahey, senior economist at Deutsche Bank, said it would take August job losses of 100,000 and a 4.7% unemployment rate to convince him the Fed will cut rates next month. More likely, he said, the Fed will keep rates at current levels into the first quarter of 2002.

Two of the economists calling for an October rate cut--Robert DiClemente at Salomon Smith Barney Inc. and Drew Matus at Lehman Bros.--nonetheless warn the Fed will be raising rates again by April, assuming an economic recovery is underway. “When the recovery happens, it will happen sharply enough to get the Fed concerned about inflation,” Matus argued.

After the Oct. 2 meeting, Fed policymakers will have two meetings left this year--Nov. 6 and Dec. 11. They can take action on rates between regularly scheduled meetings, but that it is relatively rare.