Further Discount-Rate Cut Predicted: Cut in Discount Rate Predicted
Former Federal Reserve governor Lyle E. Gramley predicted yesterday that concern about the pace of economic growth in the United States and elsewhere will cause the Fed to continue to ease monetary policy.</br></br>Gramley, now chief economist at the Mortgage Bankers Association, said that, if the Japan and West German central banks would agree to a coordinated set of interest-rate cuts, the Fed probably would reduce its 51/2 percent discount rate within four to six weeks. If the other nations do not agree, such a reduction probably still would come within two to three months, he said.</br></br>As recently as two weeks ago, many financial-market participants seemed to share GramleyÛªs view that the Fed would continue to reduce the discount rate, which is the interest rate it charges on loans to financial institutions. Since then, scattered signs of faster economic growth and new fears about inflation have turned market sentiment around; long-term interest rates, in particular, have been rising.</br></br>Prior to a rally yesterday, some long-term government bonds had dropped more than six points, with each point representing $10 in market value. Bond prices decline when investors demand higher yields before buying them.</br></br>Gramley worked at the Fed for many years as an economist and eventually as director of research before becoming a member of the Council of Economic Advisers and then returning to the central bank as a board member.