WASHINGTON -- Federal Reserve policymakers meeting today are probably going to endorse another round of cuts in short-term interest rates to help the ailing economy, which appears to be in renewed danger, financial analysts say.
The analysts said they expect the Federal Open Market Committee to trim the federal funds rate once again, this time to 4.25% from 4.5%, and for an accompanying move by the Federal Reserve Board to drop the discount rate to 4% from 4.5%.
There is a good chance both actions will come tomorrow, when Federal Reserve Board Chairman Alan Greenspan is scheduled to testify before the House Ways and Means Committee on proposals to stimulate the economy with tax cuts.
"It is entirely possible he'll go into that hearing with a monetary policy action in his pocket," said Richard Berner, a director in the bond market research department at Salomon Brothers Inc.
Evidence that the economy is either at a standstill or crumbling once again after a six-month statistical rebound during the spring and summer has been piling up in recent weeks.
The latest piece of information was yesterday's Fed report showing that industrial production in November plunged 0.4%, ending three months in which output remained relatively flat. The operating rate for U.S. factories, mines, and utilities fell from 79.6% to 79.1%, the second monthly decline in a row and the lowest rate since May.
"It's a very sick economy, and the industrial production numbers just confirm that," said David Wyss, senior economist for DRI/McGraw-Hill Inc., an economic forecasting firm in Lexington, Mass. "We're not getting the recovery that we seemed to have in the spring, and I don't think we're going to have it until next spring."
Last week, the Commerce Department reported that retail sales remained weak in November, rising only 0.3% to a seasonally adjusted annual rate of $153.1 billion -- virtually the same pace that has prevailed since July.
"Consumers don't have any confidence, and they don't have any income, and without either of those, it's hard to spend money," Mr. Wyss said.
A new round of rate cuts by the Fed will probably come too late to do much good in terms of perking up Christmas shopping by consumers, said Louis Crandall, chief economic for R.H. Wrightson & Associates Inc. But he and other analysts said that, if the Fed does act, large commercial banks are likely to follow with a reduction in the prime lending rate to 7% from 7.5%. That in turn would lower rates consumers pay on home-equity loans as well as rates paid by small business borrowers.
"The point is that rates have to go lower, and the Fed is going to keep probing until they see some signs of response in interest-rate sensitive sectors, such as housing," Mr. Berner said. "We have seen some response, but not enough."
Mr. Greenspan and Fed Board Vice Chairman David Mullins have emphasized in recent public speeches that there are limits to how much help the Fed can provide when consumers and businesses are reluctant to take on additional debt and when banks are not rushing to lend. Mr. Mullins, in comments last week to the National Economists Club, said he expects the economy to stay flat at least for the first three months of next year before recovering.
Mr. Mullins also was optimistic about inflation remaining under control, which analysts said gives the Fed room to maneuver without agitating the bond market and driving long rates higher.
Last week, the Labor Department reported that the consumer price index rose a moderate 0.4% in November, marking an inflation rate of only 2.9% for the first 11 months of the year. Producer prices have been behaving even better and actually have stayed below the level of a year earlier. "The numbers are at least supportive of the notion that we still have inflation under control," said David Cross, senior consultant with Futures Group Inc., an economic advisory firm.
Two new voting members on the FOMC, Board Governors Susan Phillips and Lawrence Lindsey, have been confirmed by the Senate and will be attending this week's meeting. Both appointees of the Bush administration are viewed by market participants as relatively dovish on monetary policy and inclined to go along with any rate cuts. The addition of Ms. Phillips nd Mr. Lindsey brings the seven-member Federal Reserve Board to full strength.
Analysts say Fed officials remain under intense political pressure from both the administration and Congress to continue relaxing credit as long as the economy looks flat or is in danger of turning down again. "Nothing that could truly be called a recovery is likely to develop through the winter," said analysts at Merrill Lynch & Co. in their latest market letter.
The firm is now forecasting that real gross domestic product will drop at an annual rate of 1% in both the current quarter and in the first quarter of 1992. Yields on 30-year Treasury bonds could fall to 7.5% and stay below 8% for most of next year, said the Merrill Lynch economists.
Other analysts are slightly more hopeful about the economy, but the differences in forecasts are marginal and do not have much statistical significance. For example, the forecast at Joel Popkin & Co., according to firm economist Kathryn Kobe, is for growth of about 0.5% in the current quarter, followed by "very slow" growth in the first half of 1992.
"I think the Fed is under some political pressure," said Ms. Kobe. "I don't think they necessarily would lower rates if they thought it was the wrong thing to do, but everyone is looking at the stagnant economy right now, and the Fed is the only way to go."
Mr. Greenspan and his colleagues, said Mr. Wyss, "know they have to get a recovery going before Nov. 3, and that puts additional pressure on them to act sooner rather than later."