With the economy's vital signs stable, the Federal Reserve is unlikely to lower interest rates again Tuesday when its monetary policy committee meets in Washington.
Fed Chairman Alan Greenspan signaled this on Friday when he told Congress that business conditions had "improved in recent months." He then typically qualified the statement by adding that the "outlook is not without concern."
But several Wall Street economists doubt the economy is quite as healthy as it looks right now, and they wonder if the Fed may be playing a dangerous game by waiting for evidence of a slowdown.
"They could be 'cruising for a bruising' for all of us by being so slow about lowering rates," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell/C.J. Lawrence Inc.
Mr. Yardeni noted that recent comments by Mr. Greenspan and other Fed policymakers stand in odd contrast to these same central bankers' views of a year ago, when interest rates were rising.
"Last year they frequently justified tightening credit by saying monetary policy impacts the economy with a long lag time." he said. "They said they had to tighten before inflation became a problem because of this lag.
"Now they seem focused only on the current condition of economy without considering what the risks might be over the next 12 to 24 months," he said.
Mr. Yardeni says that the risks ahead are of a weaker economy, and that the Fed, by shifting from "acting preemptively last year to being contented now" could cause a repeat, in reverse, of the monetary policy mistakes of the 1970s.
In that era of rising inflation, he said, the Fed always seemed to "tighten too little, too late" to control the problem. Now, it may be slipping into a mirror-image posture of failing to ease credit sufficiently in time to head off problems, he said.
The Fed doubled its target rate for overnight interbank loans, better known as the federal funds rate, in a yearlong effort ended last February. It shifted gears in July, but only sliced the rate target by a quarter point, to 5.75%, in a compromise move by a divided Open Market Committee.
Philip Braverman, chief economist at DKB Securities (USA) Corp. expects the central bank to cut rates later this year in response to a weak economy, but to do nothing on Tuesday.
"My suspicion is that they may wait to see exactly what Congress does or doesn't do on the budget front," he said. "That could put off the next easing until late October, but hopefully no later than that."
Indeed, the Fed may be loath to act during what is shaping up to as an epic congressional debate over federal budgetary priorities and government finance.
Last week, House Speaker Newt Gingrich, R-Ga., rattled the financial markets by suggesting the federal government might default on its debt for the first time if there is a stalemate over raising the federal debt ceiling.
"I don't care what the price is," he told the Public Securities Association, an organization of bond traders. "I don't care if we have ... no bonds for 60 days."
Treasury Secretary Robert E. Rubin rejoined that President Clinton would not be "blackmailed" by the Speaker's "unprecedented and unwise" remarks. He termed a default "unthinkable."
Unlike some economists, neither Mr. Yardeni nor Mr. Braverman believes the nation's economy will gain strength and momentum from the third quarter through the end of the year.
"With special factors like military base closings, budget cuts not moving in tandem with tax cuts, and weak auto sales, I see the fourth quarter no stronger and perhaps weaker than the third," Mr. Braverman said.
Both economists expect the Fed to have to cut the funds rate target by half a point this year, and to keep lowering rates well into next year in an bid, perhaps a belated one, to maintain the economy's forward momentum.