Interest rates: going down after six hikes?

Federal Reserve policymakers, meeting tomorrow, are coming under increasing pressure to cut interest rates to maintain a nearly 10-year-old economic expansion.

It is coming from American businesses, hit by an abrupt economic slowdown. "A rate cut is imperative, and soon," says Jerry Jasinowski of the National Association of Manufacturers.

The heat is also coming, by inference, from President-elect George W. Bush and his team.

"We may well be on the front edge of a recession here," Dick Cheney, vice president-elect, warned earlier this month. Many economists saw the unusual remark as an effort to pin the blame for any downturn on the Clinton administration. But it also could be seen as a hint to the Fed to start softening monetary policy.

Mr. Bush was scheduled to meet with Fed Chairman Alan Greenspan today to discuss the slowing economy. The president-elect knows that vigorous growth is vital to the success of his presidency. He also wants to be sure the Fed and the new administration aren't at odds about economic policy. Mr. Bush's father and his administration fought with the Fed, seeking lower rates to revive a weak economy. The elder Bush blamed the Fed for his defeat by Bill Clinton in 1992.

The younger Bush is expected this week to name Lawrence Lindsey, a former Fed governor, as his top economic coordinator in the White House. He was a fellow policymaker with Greenspan. "They got along quite well," says Alan Blinder, also a former Fed governor and now a Princeton University economist.

Behind the increased pressure on the Fed is a slowdown that has been much more sudden than many economists had expected just a few weeks ago. It is starting to hit businesses sensitive to interest rates - now at a 13-year high - in particular, such as the auto and building industries. For example:

* Dana Corp., a Redding, Pa., firm that makes axles and other parts for Detroit, has just laid off 3,500 of its 80,000 workers. More pink slips may follow soon, since all three big American automakers have announced plans to curb production. "Interest rates have room to come down," says Dana spokesman Gary Corrigan, almost pleadingly.

* Shelby Industries, a small company that makes winches, trailer couplers, jacks, and other devices, is letting attrition knock its workforce down from 80 to 74. "The whole economy is looking shaky," says Lalit Sarin, chairman of the Shelbyville, Ky., firm.

Mr. Greenspan assured the nation Dec. 5 that the Fed was prepared to come to the rescue of the economy if necessary. But economists are divided over whether it will act to lower rates this week. Charles Blood, an economist at Brown Brothers Harriman & Co., a New York investment firm, suspects the Fed is "on track" for a rate reduction tomorrow.

More likely, most Fed watchers say, the central bankers will signal a shift from their previous view of inflation as the greatest risk ahead to a neutral stance. An interest-rate cut would probably not come then until the new year. Further, these economists see the Fed reversing at first just one of the six 0.25 percentage-point hikes in short-term rates it's made since June 1999.

Some don't think that's enough. Barry Bluestone, an economist at Northeastern University in Boston, urges the Fed to chop rates a full one-half percentage point now. "It might be time for some tax cuts, too, though maybe not as big as proposed by George W. [Bush]," he adds. "That would get some money into people's pockets."

David Wyss disagrees. The Standard and Poor's economist says the Fed shouldn't lower rates until next year. And Congress shouldn't attempt to cut taxes to stimulate growth. "It is best to let Greenspan manage the economy," he says. That's because Congress can't move quickly. Its tax-cut moves in the past have tended to be late and "destabilizing."

Republicans see the downturn as proof a tax cut is needed. "Bipartisan tax cuts may come from the need to remedy a steadily weakening economy," says Lawrence Kudlow of ING Barings, a New York investment firm.

With government statistics weakening and many firms reporting poor earnings, economists are lowering forecasts. The consensus of 52 top forecasters taken this month by Blue Chip Economic Indicators is that the economy will grow 3.1 percent after inflation next year. That is down from 3.4 percent a month earlier. "By consensus standards, that is a pretty good drop," says Randell Moore, survey editor.

While few economists predict an actual recession, they see plenty to worry about. Bank lending has tightened. The initial-public-offering market for stocks has dried up. Auto sales are down. Oil and gas prices are higher. Unemployment is rising modestly.

Nor are US interests the only ones concerned about the downturn. Stephen Roach, chief economist for Morgan Stanley, a New York investment firm, warns that "an abrupt shift in the US growth dynamic" would certainly "reverberate" around the world.

So far, though, not all US firms are hurting. Edison Price Lighting, a New York maker of recessed lighting fixtures, is still seeing brisk sales, says president Emma Price. ICI Americas Inc., the US subsidiary of a London-based chemical firm, also expects a good fourth quarter. "But, says spokeswoman Chris Till, "everybody is really watching it."

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