More interest rate ease-up seen. Fed action is predicted as prod to the economy
In banks, board rooms, and brokerages -- where interest rates are keenly followed -- perception is nine-tenths of the game. The prevailing perception is that interest rates are coming down, with or without a big reduction in the federal budget deficit. And the growing probability of a significant deficit cut in Washington encourages things even more, economists and bond-market specialists say.
The key interest rate to watch is the discount rate, which the Federal Reserve charges for loans to member banks. It is now 8 percent. Analysts predict the Fed will adjust the rate to 73/4 or 71/2 percent shortly in order to stimulate economic growth.
That would also be a reward to the Senate for taking a big step last week toward reducing the budget deficit.
Other rates would slide as a result, and in fact, according to Douglas McAllister, a government bond specialist at Prudential-Bache, the bond market has already built an anticipated discount-rate cut into its prices.
Tuesday's report of a smaller-than-anticipated increase in retail sales (0.9 percent) in April shows an economy still in need of some prodding, Mr. McAllister notes.
Today's data on industrial production, widely expected to be fairly sluggish, could also prompt the Fed to cut the discount rate. The Fed reviews credit policy next Tuesday at a meeting of the Federal Open Market Committee.
Bond prices have risen -- and interest rates fallen -- since last Friday, shortly after the Senate worked out a deficit reduction package. The stock market has also done well since Friday.
The bond market rally is being popularly billed as an endorsement of the Senate budget compromise. White House spokesman Larry Speakes noted Tuesday that ``the response from money markets to the Senate's historic budget vote shows just how robust the recovery will continue to be if the House of Representatives will now match the Senate's resolve to reduce budget deficits.''
``The budget package is a very important step forward,'' says Richard D. Rippe, senior vice-president and economist with Dean Witter Reynolds. ``[Fed chairman] Paul Volcker has told us that this is what is needed, and here is the start of the package.''