Fed's Credit Easing and Dollar's Fall Are Expected to Yield Mixed Results
NEW YORK -- The Federal Reserve's abrupt credit easing and the dollar's sharp fall will help avert a recession next year, according to many economists and investment managers. But they also predict that inflation and interest rates will rebound next year.</br></br>Since the Oct. 19 stock market crash, interest rates have tumbled more than 1 1/2 percentage points as the Federal Reserve suddenly opened the monetary spigot in an effort to calm the financial markets. Last week, the Reagan administration emphasized that its top priority is to prevent a recession, even if that means a lower dollar.</br></br>These policies may only provide "a respite" for the credit markets, says John Paulus, a managing director at Morgan Stanley & Co. "This is a strategy to avoid serious action on (cutting) the budget deficit while liquifying our way past a recession. The Republicans are whistling past the graveyard by doing nothing."</br></br>Radford Rigsby, a portfolio manager for the Harvard Management Co., says he is "very cynical" about the recent bond market rally and remains concerned about the long-term inflation outlook. Although the dollar already has declined as much as 7% against most major currencies during the past three weeks, "we may have to wait until the end of 1988 before we see a big rise in inflation," he says.</br></br>"I own a lot of bonds right now, but I'm not sure how much longer I'll hold on. I'm grappling with what to do," says Jim Rogers, a private investor and professor of finance at Columbia University.