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Whatever the Fed does, you'll feel it

Will he or won't he? Alan Greenspan has the whole world guessing whether he'll cut interest rates to strengthen the sagging economy.

Either way, your pocketbook will get impacted this year _ savings rates, mortgages, you name it.

Problem is, even the experts are divided on how they interpret the Federal Reserve chairman's latest remarks. One expert quoted a line from Simon and Garfunkel's song The Boxer: "A man hears what he wants to hear and disregards the rest."

This much is clear:

There are more economic indicators pointing to a Greenspan rate-cutting scenario than there are signs that the economy will soon bounce upward. Consumer and wholesale prices are relatively flat, as is job growth.

Falling mortgage rates, and big decreases in bank CD rates, mean the financial markets are braced for a possible Fed cut.

Mortgages are already below 7 percent on 15-year fixed rates, and in markets such as Texas you can find 30-year fixed rates also at 7 percent. The average five-year CD yield has been skidding by about one-tenth of a percent per week for the past several weeks. At the beginning of the year you got 6.7 percent on a typical five-year account; today it's paying only 5.73 percent, according to Bank Rate Monitor.

The domestic economy is only one factor that Greenspan and company must weigh before Alan says aye or nay to a cut. If Japan doesn't agree to open its auto market to U.S. manufacturers by the June 28 trade-sanction deadline imposed by President Clinton, the Japanese could retaliate by playing hardball. They could back away from their heavy investments in U.S. government securities.

To keep U.S. investment yields competitive in the world market, the Fed would have to raise interest rates, not lower them. If that happened, the effect would be inflationary and depress stock prices. Economic growth would be further stalled. Your mortgage rates would probably rise, even though your savings yields would probably keep dropping.

You know what happened during the last recession. The same experts quibbled over when the recession began and ended, but between 1989 and 1994, for every $10,000 you invested in a one-year CD, your annual interest earnings plummeted from $951 to $308.

But if another recession took root, this time you'd be starting from a much lower rate base than in '89. You'd see the average one-year CD yield sink below the record 3.08 percent low reached a year and a half ago. I'd hate to think of how far south the money market account _ now at only 2.88 percent _ could go.

This economic situation could have a major political fallout. A while ago, the experts predicted that interest rates would rise until the middle of 1996. After that, they said, the country would fall into a recession that would be worse than the last one.

That, of course, would make an incumbent president a sitting duck in next year's November election. But that's not how it has turned out so far. Interest rates stopped shooting up early this year as the economy slumped. Which raises the question: Since a Fed cut this year would normally take six months to feel its way into the economy, wouldn't that create a stronger economy in 1996?

Latest rate trend: Average long-term CD yields again declined faster than short-term ones, with Bank Rate Monitor's ratio of decreases to increases widening to 11-to-1 from 5-to-1.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.