Interest rates are headed down again next year, according to the latest American Banker yield and rate survey. The biggest question seems to be how far.

The consensus expectation of economists queried for the new survey is that by this time next year the Federal Reserve will probably have sliced the overnight federal funds rate by another half percentage point, to 4.25%. A few think the Fed will not go that far, but others think the reduction could be deeper, with the central bank cutting the rate to 3.75%, from the current 4.75%, to counter an economic slowdown.

"You would hardly know it from the numbers, but a slowdown is evolving right now," said Kenneth T. Mayland, chief economist at KeyCorp of Cleveland. "Actually we are already fairly well along in this process, and that will be more apparent as we move into 1999."

Most see the yield on three-month Treasury bills headed well below 4% during the next year and one-year bills testing the 4% level. Some think the 30-year Treasury bond yield will move permanently below 5%.

This rare unanimity among economic seers in banking and business on the direction of rates stems from expectations of a slower U.S. economy coupled with slack economic conditions abroad and continued low inflation-1.6% this year and maybe lower next year.

Though the central bank, as expected, did not cut rates last week after three reductions during the fall, observers suggested that this simply gives the Fed more room to drop rates later and with greater effect.

"The last time inflation was this low was in the 1960s," said Nicholas S. Perna, chief economist at Fleet Financial Group in Boston. He said the Fed may slice the federal funds rate to 4.5% next year. "Even with the recent interest rate cuts," he said, "the real fed funds rate (fed funds minus inflation) remains significantly higher than it was then."

Economists at New York's Chase Manhattan Corp., in their recently published forecast for next year, said both economic growth and the inflation rate will fall to about 1% or less in 1999 "and long-term inflation expectations will continue their decade-long decline."

As a result, the Chase economists said, the Fed will reduce the federal funds rate to the 4% to 4.5% range by mid-1999 and below 4% by yearend.

Part of the reason is a perceived turn in thinking at the Fed, said the Chase forecasters, led by chief economist John Lipsky.

"For the past two years the Fed operated monetary policy with a 'bias to tighten,' even though inflation was falling," they wrote. "Earlier this year the Fed effectively allowed policy to tighten by holding nominal interest rates steady even as inflation declined and long-term interest rates fell."

"This 'passive' policy tightening-that Fed officials have admitted was not inadvertent-reflected earlier concerns about rising inflation risks spurred by strong growth," they noted.

But more recently, according to minutes of its monetary policy sessions, the Fed's own forecasters have begun anticipating slower growth. In recent months the central bank has shifted from a tight credit stance toward a more neutral posture.

"A neutral level for the federal funds rate is most likely around 4%," the Chase economists said.

They acknowledged that their forecast amounts to a "more aggressive view than is reflected in market prices at present." But they said they do not believe the Fed has gone too far or too fast with recent rate cuts and, thus, there is no barrier to new cuts.

Moreover, they said there is little or no chance that inflation will rebound. "Rather, the prospect of further weakening of global demand growth in the coming year implies that disinflation forces will remain intense."

A few economists said rates will go much lower. David Levy of the Levy Institute at Bard College in Annandale, N.Y., said he thinks recession is a distinct possibility next year, with federal funds falling toward the 1% level.

But even economists who foresee only a minimal slowing of business conditions next year anticipate lower rates.

Stuart G. Hoffman, chief economist at PNC Bank Corp. in Pittsburgh, said the economy will still grow a healthy 3.6% next year, versus a likely 4.8% this year. Still, he anticipates the Fed will cut rates.

As he sees it, the Fed's autumn "triple play" of rate cuts foreclosed the possibility of recession or severe slowdown next year. But he said he expects that the Fed, after a "well deserved rest" at last week's final 1998 meeting, will "execute a double-play rate cut" by midyear 1999, bring down the federal funds rate to 4.25%.

He also said he expects the 30-year Treasury bond to yield between 4.5% and 4.75% and 30-year mortgages to ease to a 6.25% to 6.5% range. Meanwhile, he said, inflation will probably remain in the 2% vicinity.

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