How low will the Fed drop interest rates?

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Continuing their mighty but so-far futile efforts, Federal Reserve Board Chairman Alan Greenspan and his policymaking cohorts will lower rates again when they meet today, experts say.

The rate cut, which is expected to be one-quarter of a percentage point, or 25 basis points, will be the seventh this year. It will lower the key federal funds rate to 3.5 percent.

Whether it’s the last for the year depends on the economy finding its footing after stumbling around in the dark for most of 2001.

“They will reduce their target rate by another quarter point at their meeting,” says Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. “The sluggishness has not left the economy.

“We continue to see manufacturing and technology in recession, and their travails are beginning to seep over into other industries, including travel and wholesaling and retailing. The Fed is going to have to add a little bit more cushion.”

So far this year, Greenspan has been stuffing the interest-rate beanbag as chock full as he can. He and the other members of the Federal Open Market Committee, which sets interest rate policy for the broader Fed, already have slashed the funds rate to 3.75 percent from its 6.5 percent level at the beginning of January.

Some call his actions futile and say the economy will remain weak or even slip into recession. After all, reports on industrial production, retail sales, manufacturing employment and other things continue to look bleak despite the dramatic cuts to date.

But others think the Fed will succeed in pulling the economy back from the brink. The housing market remains strong, and unemployment overall remains low by historical standards, they say. Plus, tax cuts are giving Americans more money to spend.

Regardless of their position in the broader debate, everyone agrees that FOMC members will lower rates today. After that, things get tricky.

Officials have three more scheduled meetings this year on Oct. 2, Nov. 6 and Dec. 11. Tannenbaum says this cut probably will be the last and that rates will remain steady for the rest of the year.

But he expects the Fed to leave the door open to future cuts. If the economic data deteriorates further, there could be more interest rate reductions this fall.

“It’s a matter of time,” he says. “I know that business people and investors would like more instant gratification as we all do in our various capacities, but economics works with lags. With the cuts to date soon to reach their full potency, we should be seeing some signs of improvement without much additional movement from the Fed.”

— Updated: Aug. 21, 2001