The Federal Reserve may play Santa Claus tomorrow and lower interest rates. But it could also play the Grinch.
The central bank's monetary policy savants gather Tuesday in Washington for the last time this year to assess business conditions.
"Looking at things as they do, it strikes me that the economy is performing about as well as could be expected," said James E. Glassman, senior economist at Chemical Securities Inc., New York.
"There is confusion about what's been going on in the fourth quarter, but the second half of the year appears to have exceeded their expectations," he said.
More specifically, he noted "unemployment is staying steady around 5.5%, and we may get a tremendous lift from long bonds falling to 6% and the stock market running higher."
Mr. Glassman thinks the Fed would be satisfied with growth around 2% next year - less economic growth than many on Wall Street would like to see.
Three Fed governors - Alan Blinder, Lawrence Lindsey, and Janet Yellin - are known to favor a rate cut. But Mr. Glassman said the other members of the Federal Open Market Committee probably do not want to be rushed.
Sung Won Sohn, chief economist at Norwest Corp., Minneapolis, also thinks the Fed will forgo a rate cut at the Tuesday meeting, because there is "no urgency" right now.
"They can just as well wait until the end of January for their next meeting," he said. "Then they can look at all the data for the fourth quarter and form a better picture."
He added, "Nobody feels that the economy is falling apart, or in need of an immediate dose of stimulus. That will be an important point made" at Tuesday's session.
"There is just not a strong consensus on the (committee) for rate cutting right now," he said. Even the three governors who feel rates are too high, in inflation-adjusted terms, "are really talking about a problem at the margin," he said.
In addition, despite the flat consumer price index report last week, inflation may still run 2.5% to 3% next year, and the central bank certainly regards that as too much, he said.
But while Mr. Sohn expects that the Fed will not cut rates on Tuesday, he nevertheless feels it should. It would be "an insurance policy" against an economic slowdown next year.
Edward Yardeni, the chief economist at Deutsche Morgan Grenfell/C.J. Lawrence Inc., said he would elevate the chances of a recession next year to 35% from 30% if the Fed does not cut rates on Tuesday.
While that means he would still regard a recession as doubtful next year, Mr. Yardeni assessed the risks at 25% a couple of months ago.
Among other things, Mr. Yardeni thinks consumers, who drive the economy, are "tapped out and too much in debt." He said he feels this way because he is "not a big believer in the so-called wealth effect."
"I believe that jobs drive retail sales, not the value of 401(k) stock portfolios," he said. But he acknowledged that a huge amount of wealth has been created in this year's stock and bond market rallies, and that this could help stimulate the economy.
Wayne M. Ayers, chief economist at Bank of Boston, continues to expect a 25-basis-point cut in rates by the Fed on Tuesday. "It would help solidify" the current economic environment, he said.
"If the Fed sees a reasonable case for easing over the next two to three months, I think they will decide there is very little chance of losing much by acting now rather than later," he said.
