The current sentiment on Wall Street is that Federal Reserve policymakers will probably not raise interest rates this week, as much as they might like to do so.
"There's the will but no way," said Nicholas S. Perna, chief economist at Fleet Financial Group, who thinks the central bank lacks the necessary "political cover" to raise rates right now.
While Fed Chairman Alan Greenspan has asserted many times that rate action would occur whenever necessary, many economists think benign inflation and the currently mixed picture of the economy do not amount to a solid case for credit tightening.
Moreover, the Fed surely does worry about public and political support for its monetary policy. And it is clearly in a difficult position, since a rate increase might snuff out the high-flying bull market in stocks.
"No matter how well the Fed slows the availability of credit from here on, it will not have broad public support for such action," said veteran Wall Street economist and Fed watcher Henry Kaufman, summing up the central bank's quandary.
That is because many middle-income Americans now are serious equity investors, he said at a recent bank stock conference sponsored by UBS Securities. While political and business leaders always found monetary tightening distasteful, individuals in earlier periods were mostly bank depositors who could count on greater interest income as rates rose.
And even if they did not enjoy higher interest income, insured bank depositors were also at low risk of any harmful personal impact from a fall in the stock market that might result from monetary policy.
Mr. Kaufman, who heads his own New York consulting firm, warned three years ago that "the ongoing large purchases of stock mutual funds by households will increase volatility in equity prices and complicate monetary decisions" by the Fed.
The economist said then and emphasized again that "stock mutual fund investors are not overwhelmingly long-term investors."
A slow ebbing of stock prices, he said, would probably not interfere with further rate hikes by the Fed, but a dramatic drop would force the Fed to reassess the damage this would cause to household spending.
"Unfortunately," Mr. Kaufman said, "there is no historical event that will provide adequate guidance in this matter."
Another veteran observer, economist S. Jay Levy of Bard College, Annandale, N.Y., who has published Industry Forecast for 48 years, said he has never seen the economy nearly so affected by the stock market.
"The performance of the stock market and the public reaction to it hold more sway over the economy now, and add more uncertainty, than at any time since the 1930s," Mr. Levy and his son, David Levy, recently wrote.
"The rising stock market, the wealth effect, (corporate) profits, the economy's vigor, and the prolonging of the consumer credit cycle are mutually reinforcing phenomena," they said. "If the stock market or profits start to fall, they will reinforce each other on the downside as well."
While emphasizing that they are not equity strategists, the Levys cautioned that a bear market would jolt consumers, businesses, governments, nonprofit organizations, and global financial markets.
They predicted that the economy would either slow in the second half, with falling rates, or, if rates rise, a sharper slowdown or recession could be in the cards for late this year or 1998.
