FOMC Raises Possibility Of Another Interest-Rate Cut

ByJohn S. McClenahen The question now is what will the interest-rate-setting Federal Open Market Committee (FOMC) do at its next scheduled meeting on Oct. 2. Another 25-point drop in the influential federal funds rate, which would be the eighth decline in U.S. short-term interest rates this year, is a distinct possibility. One reason: The FOMC believes that the risks to its goals of price stability and sustainable economic growth "are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." In other words, the 300-basis-point cut in the federal funds rate that it has engineered so far this year may not have been enough. In the wake of the Aug. 21 25-basis-point reduction, the federal funds rate is at 3.5%, its lowest since 1994 and three full percentage points below its 6.5% rate on Jan. 1. "As important as the rate cut itself the Fed's decision to maintain its economic growth bias is a clear expression of its willingness to cut rates further if necessary to get the economy moving," says Martin A. Regalia, vice president and chief economist at the U.S. Chamber of Commerce, Washington. Because U.S. manufacturing is still hurting economically, Jerry J. Jasinowski, president of the National Assn. of Manufacturers, Washington, wishes the FOMC had lowered the federal funds rate by 50 basis points on Aug. 21. "While some causes of the 'manufacturing recession,' such as inventory overhang and a spike in energy costs, appear to have been reversed, clear signs of a recovery have yet to appear," he laments.