Slight Drop in Interest Rates Seen in Early '86 --- Most Economists Surveyed Forecast Rise in Second Half
NEW YORK -- Interest rates, which tumbled in 1985, will drop slightly further early this year but then level off and edge higher during the second half, according to a survey of 25 economists by The Wall Street Journal.</br></br>Most forecasters also expect the economy to continue expanding throughout 1986. But few foresee a performance as strong as the Reagan administration predicts, and many fear the government's budget deficit forecasts will prove to be overly optimistic.</br></br>Much to the chagrin of administration officials, recent government reports indicate that the economy remains lethargic. That has intensified speculation that the Federal Reserve soon will lower its discount rate to 7%. The discount rate, which has stood at 7 1/2% since May, is the rate charged by the Fed on loans to banks and savings institutions.</br></br>If the Fed cuts its discount rate, banks probably will respond quickly by lowering their prime lending rate to 9% from 9 1/2%, analysts say. That would be the first cut in the prime, or base, rate on corporate loans since June. A year ago, the prime rate stood at 10 3/4%.</br></br>But any additional declines in borrowing costs are likely to be small and short-lived, economists say. They argue that the Federal Reserve's credit-easing moves over the past several months already have set the stage for moderate economic growth in 1986, accompanied by only a mild increase in inflation. Most forecasters predict that interest rates will be higher a year from now, but not by much. A large majority contends that rates will wind up 1986 within a percentage point of current levels.