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Interest rate rumbling
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September 15, 1998: 8:44 a.m. ET
Analyst believes Fed will lower rates later this month, G7 nations likely to follow
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NEW YORK (CNNfn) - With government and financial leaders urging the United States to take the initiative in rescuing the ailing emerging markets, rumblings that the Federal Reserve may cut interest rates are growing louder.
President Clinton Monday reiterated the "inescapable obligation" of the United States to help stabilize global economies, while at the same time urging Congress to approve new financing for the International Monetary Fund, money that would be used to bail out troubled economies.
Similarly, Federal Reserve Chairman Alan Greenspan earlier this month warned that the U.S. economy is vulnerable to the effects of international market volatility. He added the U.S. economy is facing a range of potential problems, including deflation, from the international crisis and domestic inflation.
Financial analysts say a U.S. interest rate cut would give other G7 nations the confidence to follow suit, which in turn would help revive the ailing economies of many emerging markets, including Russia, Asia, and Latin America.
Germany, China and the United Kingdom reportedly are considering an interest rate cut. And last week, the Bank of Japan reduced rates by ¼ of a percentage point.
"The key is for the U.S. to show leadership, and that starts with a rate cut (at the Federal Reserve meeting) on the 29th (of September)," said John Ryding, senior economist for Bear Stearns.
Greenspan is scheduled to address Congress on the state of the economy Wednesday, following billionaire financier George Soros's meeting on Capitol Hill Tuesday. Analysts, who believe Greenspan's latest speech signaled a pending interest rate cut, will be listening closely to his testimony.
Under Greenspan's leadership however, Ryding said, the Fed historically has adjusted rates in cautious increments, "especially at its first move."
That suggests the central bank may cut the rate by only ¼ of a percentage point later this month, he said, adding that would "not be the last cut we see this year."
Ryding expects the Fed to lower interest rates by half a percentage point in the long run.
"I think they'll probably cut rates at the Sept. 29 meeting two weeks from today," he said. "I think the risk of imported deflation continues to grow and if the Fed doesn't cut on the 29th, I think there'll be extreme disappointment to the financial markets, which as Greenspan pointed out in his speech a week and a half ago, would produce increased restraint on the U.S. economy."
In his Sept. 4 speech at the University of California in Berkeley, Greenspan said the risk of rising inflation has become more "balanced" since the Fed's August meeting.
European stocks slipped into the red early Tuesday as investors await word on any changes to U.S. monetary policy and struggle to shake off the effects of world market turbulence.
Monday, Clinton called on central bankers and finance ministers from the Group of Seven industrialized nations to convene in Washington within the next 30 days with Greenspan and Treasury Secretary Robert Rubin. The meeting will focus on ways to strengthen global economies, reform markets and help the IMF adapt to meet the challenges of the new financial crisis.
Adding fuel to the fires of interest rate speculation, G7 officials overnight said they would do whatever is appropriate and necessary to stabilize the changing world market economy.
The Bank of England has hinted they are concerned about possible deflation, leading some analysts to predict a rate cut there by year's end.
Not all G7 nation's however, support the concept of a global interest rate cut. Germany's central bank reportedly has denied rate cuts lie ahead, saying monetary conditions differ from economy to economy. No coordinated interest rate cut would work, leaders at Germany's central bank said. 
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Federal Reserve
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