The Federal Reserve will move quickly to lower interest rates now that negotiators have reached agreement on a deficit-cutting plan, many economists predicted Monday. But these analysts said the interest rate relief will be too little and too late to avert a recession. This forecast was made on the eve of a key meeting Tuesday of the Fed's top policy-making group, the Federal Open Market Committee. The panel, composed of Fed board members in Washington and Fed regional bank presidents, meets eight times a year to set interest rate policies. President Bush told reporters Monday that he was looking for the Fed to lower interest rates ``once they see that a sound budget agreement has been put into effect.'' Bush and congressional leaders have pledged to try to write the agreement into legislation and enact it by Oct. 19. Many economists expected a vote at Tuesday's meeting to nudge short-term interest rates down by about one-fourth of a percentage point. The actual rate cut, they said, might come as early as next week. Some economists said the rate cut would be enough to prompt commercial banks to lower their benchmark prime lending rate from 10 percent to 9.5 percent, although there wasn't universal agreement on this forecast. Analysts who expect a fairly prompt Fed easing move noted numerous statements Federal Reserve Chairman Alan Greenspan has made that the central bank stood ready to lower interest rates following a credible, multiyear deficit reduction package. ``Greenspan has got to ease. If he doesn't, he is telling the financial markets that he doesn't view the deficit agreement as credible,'' said David Wyss, chief financial economist with DRI-McGraw Hill. Wyss said that if Congress showed evidence of moving quickly to approve the budget agreement and the September unemployment report, due out on Friday, showed a further rise in the jobless rate, then the Fed would move perhaps as early as next week to cut the federal funds rate from 8 percent to 7.75 percent. The Fed funds rate, the interest that banks charge each other for overnight loans, is the bellwether rate the Fed often uses to signal changes in its credit policies. Allen Sinai, chief economist of the Boston Co., said while he was looking for a quick rate cut on the Fed's part, markets should not expect anything beyond a quarter of a percentage point drop, given the inflationary pressures arising from a doubling of oil prices since August when Iraq invaded neighboring Kuwait. ``The Fed is being tossed back and forth by the Iraqi event,'' Sinai said. ``It wants to ease because of an impending recession but aggressive easing is very hard to do as long as the inflation threat is as great as it is.'' David Jones, an economist at Aubrey G. Lanston & Co., a government securities dealer in New York, said regardless of whether the Fed eases immediately or waits until Congress actually passes the budget agreement, the rate cut will not be in time to keep alive the current recovery, which has already lasted a peacetime record of eight years. ``The handwriting is on the wall,'' Jones said. ``The Fed has already waited too long if it had hoped to avoid a recession.'' Jones and many other analysts believe the first economic downturn since the 1981-82 slump will begin sometime in the final three months of this year. While a number of analysts forecast a Fed easing move to support a budget deal, this forecast was not universally shared. Jerry Jordan, chief economist of the First Interstate Bancorp of Los Angeles, said it would be a mistake for the Fed to rush to support the budget deal with lower interest rates. Jordan, one of a group of economists who monitor Fed actions as part of the Shadow Open Market Committee, warned that Fed efforts to ease rates ran the risk of allowing the higher inflation from this year's oil shocks to become embedded in the economy. Many analysts who believe the Fed will begin to ease rates in coming months said they looked for those rate cuts to accelerate early next year once it becomes clear the country is in a recession. Jones said the Fed will be forced next year to keep pushing rates down because the banking system - which already faces heavy losses from collapsing real estate markets - will move slower than it has in the past to lower the cost of loans to businesses and consumers in response to Fed easing moves.
