A group of bank economists prodded the Federal Reserve Wednesday to cut interest rates.
To spur the economy, the federal funds rate should be 50 basis points lower, at 5%, said Lynn Reaser, First Interstate Bancorp's chief economist and chairwoman of the American Bankers Association's economic advisory committee.
With such a rate cut, the ABA's committee of seven bank economists predicted, real gross domestic product would grow 1.9% during 1996, while inflation would rise just 2.8%.
"We're pleased with the progress the Federal Reserve has made in reducing and taming inflation," Ms. Reaser told a press conference. "But with the reduction of inflation, we feel that it would be appropriate for the Federal Reserve to reduce the interest rate."
The bankers had met with the Fed's board of governors Tuesday to discuss their semiannual economic forecast and monetary policy recommendations. Ms. Reaser said the committee expects the Fed to ease fed funds by one-quarter to one-half of a percentage point in the first quarter, possibly as soon as Jan. 30, when the Federal Open Market Committee next meets.
Ms. Reaser said lower interest rates would bolster a softening economy that has been dragged down by high personal and corporate debt burdens and by the political stalemate over balancing the federal budget.
The committee predicted consumer debt would increase 8.8% this year after 13.2% growth in 1995. Commercial and industrial debt will advance 6.8% this year after a 10.2% increase in 1995, the committee said.
Despite this, most of the seven bank economists agreed a recession is unlikely in 1996. Ms. Reaser said the economy has been "more fragile and vulnerable to external shock in recent years" but is now anchored by western states' improving performance.
Ms. Reaser said most committee members put the chance of recession in 1996 at less than 15%.
But committee vice chairman Joel L. Naroff was more pessimistic, pointing to slower employment growth as a reason for concern. The panel predicted that the unemployment rate, now 5.6%, would average 5.8% for 1996.
"Because of slow employment growth, by the end of this year we could be teetering on the brink," said Mr. Naroff, chief economist at First Union National Bank, Charlotte, N.C. "I don't see any change in employment growth, and that's really worrying me right now."
As a result, Mr. Naroff strongly supported an interest rate cut "because it would create some refinancing and lower costs on the debt that's already out there."
Mr. Duchemin writes for Medill News Service.
