Will Fed Lower Interest Rates Next Week?

By John S. McClenahen Next week is the most likely time for a move if chairman Alan Greenspan and his Federal Reserve System colleagues choose to cut U.S. short-term interest rates before the scheduled May 15 meeting of the Federal Open Market Committee, believes UBS/PaineWebber. Recent data make a good case for a cut. Retail sales fell 0.2% in March, with sales of autos and other manufactured goods lower. "The loss of retail momentum and a . . . decline in vehicle sales point to a much weaker second quarter," contends Gerald D. Cohen, a senior economist at Merrill Lynch & Co., New York. Initial claims for unemployment insurance during the week ending Apr. 7 soared to 392,000 and the running four-week average increased to 381,000. "Both are five-year highs," Cohen notes. The University of Michigan's highly regarded index of consumer sentiment is down four points to 87.8, a likely signal of a further drop in consumer spending. In the meantime, inflation at the producer level is under control, declining 0.1% in March following February's 0.1% advance. "Inflation is the least of the Fed's worries for now," judges UBS/PaineWebber. "The Federal Reserve has ample room to reignite the economy through another interest-rate reduction and make sure the current slowdown doesn't turn into a recession," says Jerry J. Jasinowski, president of the National Assn. of Manufacturers, Washington.

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