26 June 2001, 10:22  Waiting may be hardest part for Fed officials

WASHINGTON, June 26 - It's been a long six months for the Federal Reserve.
After starting 2001 with a surprise half-point interest rate cut, the central bank has been waiting for its repeated doses of monetary tonic to take effect. After five rate cuts and the economy no more chipper than it was in January, the Fed and financial markets await a rebound -- although Wall Street is showing rather less patience than the central bank.
"People have become very impatient," said Dan Seto, senior economist with Sumitomo Life Investment Co. in New York.
The Fed meets on Tuesday and Wednesday to consider interest rate policy. While Wall Street is united in thinking the central bank will cut rates again this week, economists are divided over the magnitude of that move. Some expect there will be heated debate on the subject among policymakers during the meeting.
A smaller, quarter-percentage point reduction could buy the Fed time to assess how well its previous moves are working their way through the economy, while a larger, half-point move would signal concern that growth has yet to pick up.
A poll of firms that trade directly with the Fed found 14 dealers expect the Fed to opt for the smaller easing, while 11 expected a larger cut. The meeting starts Tuesday afternoon, with a decision expected on Wednesday at about 2:15 p.m. EDT (1815 GMT).
WORST-CASE SCENARIO?
"It's a very close call," said Tim O'Neill, chief economist with Bank of Montreal/Harris Bank in Toronto, adding that the decision will likely be subject to "pretty strenuous debate."
O'Neill said he thinks the Fed will continue its pattern of half-point rate cuts, in view of "mixed" economic data lately.
Among the least ambiguous of that data are numbers for the manufacturing sector. According to the Fed's own numbers, U.S. industries are working at their slowest pace since 1983. Total industrial output has fallen for eight straight months. Job growth has also been slipping.
Harris Bank's O'Neill said the Fed will ultimately decide that the threat of near-term economic activity sputtering out overshadows the risk that, six to nine months down the road, activity will rebound sharply and usher in higher inflation.
One reason the outcome of the meeting is a tough call for private economists is that Fed Chairman Alan Greenspan has done little to tip his hand in his public comments, even though some of his colleagues have dropped hints they might lean toward a more gradualist move of a quarter point.
The half-point camp may have some pull with the Fed chief, according to Mike Moran, chief economist with Daiwa Securities America Inc. in New York. In his weekly note for clients, Moran cited a little-noticed portion of Greenspan's May 24 speech to economists in New York. In it, the chairman said the central bank looks not only at the possible outcomes of different policies, but also at potential miscalculations.
"The center of the forecast distribution ... is still important to our deliberations, but more than many people realize, policymaking is to a substantial extent focused on the potential deviations from the central forecast and the costs should those outcomes prevail," Greenspan said.
WORRY OF OVERSHOOTING
But others, including some Fed officials, are counseling further patience, warning that easing too much now risks stoking inflation down the road.
Sumitomo's Seto said he expects a quarter-point move, but with the Fed leaving open the option of easing again before its next meeting in August.
Seto said inflation is not as dormant as many have been portraying it. "It's not a forest fire yet, but there's some sparks here and there," he said.
Greenspan has stated publicly that he thinks inflation pressures are well-contained.
Laurence Meyer, known as one of the more inflation-wary Fed officials, said in a May speech that it was time for the Fed to consider the risks of "overshooting" and raising the prospect of inflation when growth returns. In a June speech, though, he also said growth in the second quarter had yet to pick up.

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