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Is a Soft Landing Or Recession Ahead?

NOT many minutes after Federal Reserve Board chairman Alan Greenspan testified before Congress Wednesday morning, economist Christopher Low had picked up the text in cyberspace. The Fed watcher at HSBC Securities Inc. quickly read over the 13 pages four times not to miss a word.

Another Wall Street economist followed most of the testimony on TV. Others economists had already read on the news wires the gist of what Mr. Greenspan said - that central-bank policymakers are considering cutting interest rates down the road.

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Reflecting on the slowness of monetary policy to affect ``the decisions of millions of households and businesses,'' Greenspan told Congress: ``There may come a time when we hold our policy stance unchanged, or even ease, despite adverse price data, should we see signs that underlying forces are acting ultimately to reduce inflation pressures.''

The prospect of a Fed policy change is high excitement for the financial community. Long-term bond interest rates by day's end had plunged 100 basis points - that is, one percentage point - to 7.53 percent. Bond prices rose $100 dollars per $1,000. Such a major shift adds billions of dollars to the value of bonds in the portfolios of financial institutions and individuals. Further, on Thursday, the Dow Jones industrial average cracked 4,000.

But will the Fed achieve its pronounced goal of a soft landing for the economy - a drop to a lower growth rate for national output and reduced inflationary pressures without a recession?

Most economists reply ``Yes.'' The consensus of 50 economists polled earlier this month by Blue Chip Economic Indicators in Sedona, Ariz., was for gross domestic product to grow 3.1 percent after inflation this year. But with the Fed pushing up short-term interest rates seven times in the past year, as the expansion ages, and as a few signs of slowing in the economy appear, more economists are speculating on a slump this year or next.

For example, Leif Olsen, a New Haven, Conn. money manager, says the Fed has ``already passed the point of no return'' - its tight money policy will prompt a recession in the future. But in the near-term he anticipates brisk economic activity.

Economists say that monetary policy shifts have an affect on the economy ``with long and variable lags.'' Most figure the Fed's actions in the past year will eventually slow the economy, but they aren't sure just when. A minority gives great importance to the money supply or bank reserves, which have been stagnant for a year. Others put their emphasis on interest-rate changes.

Nowadays, most Fed officials are of the latter camp. If these policymakers conclude that they have gone too far and economic growth is slowing too fast, they count on cutting interest rates quickly enough to stop the economic slide.

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``Success in this maneuver has not been demonstrated in the past,'' holds Mr. Olsen. ``The Fed reduced rates 27 times from 1989 to September 1992 and was unable to avoid a recession.''

Mr. Low is more hopeful. ``I don't think they have gone too far - but it is close,'' he says. He says economic growth will fall below a 1 percent annual rate later this year.

Robert Brusca, chief economist for Nikko Securities Co. International in New York, doesn't quite forecast a slump. But he does say, ``We are now at real interest-rate levels [after deducting inflation] that in the past - since 1960 - have been associated with recession. The risk is there.... I am concerned about 1996.''

John Trammell, an investment manager with A. Gary Shilling & Co. in Springfield, N.J., says: ``There have been few if any soft landings when the Fed has tightened this often.'' His firm expects a recession by the third quarter of this year.

Wall Street economist Sam Nakagama sees a slump as inevitable. ``You might as well get it over with,'' he says. ``The Fed never knows when it is at the point when it should ease.''

The economy is now in an ``overlap mode, experiencing the final stages of the past growth cycle and the first stages of the next slowdown,'' write Roger Brinner and David Wyss, two economists with DRI/McGraw-Hill, a Lexington, Mass., consulting firm. ``Both tangible and pyschological elements make this a vulnerable period. Collectively they can turn the 4 percent real GDP growth of 1994 into a stall this spring or summer followed by rising unemployment this fall.''

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