Bond Prices Rise on Forecasts That Fed Will Push Rates Down to Spur Economy
NEW YORK -- The bond market rallied yesterday amid expectations that lackluster economic growth will induce the Federal Reserve to push interest rates lower in coming months.</br></br>Prices of some Treasury bonds rose about three-quarters of a point, or around $7.50 for each $1,000 face amount. Interest rates declined at the Treasury's weekly auction of short-term bills.</br></br>"More people are becoming convinced that the economy is weak and that the Fed will lower the discount rate," said Elliott Platt, senior vice president and economist at Donaldson, Lufkin & Jenrette Inc. He predicted the Fed will cut the discount rate to 5% by mid-February to try to bolster economic activity. The discount rate, currently 5 1/2%, is the fee charged by the Fed on loans to banks and savings institutions.</br></br>Mr. Platt estimated that the economy is growing at an annual rate of only about 2 1/2% this quarter, compared with a 2.9% rate in the third quarter, after inflation. He expects a still lower 1 1/2% growth rate in next year's first quarter.</br></br>Maury N. Harris, chief economist at PaineWebber Inc., agreed that the economy "is softening" and that the central bank will ease credit early next year. Business activity will expand at a lethargic 2% annual rate in 1987's first quarter, he predicted. That won't be enough to satisfy Fed officials, who he said would prefer a rate closer to 3%.