Isi's Hyman Says Fed Will Lower Rates To 4 Percent (Update3) (DJO)

ISI's Hyman Says Fed Will Lower Rates to 4 Percent (Update3)

By Bob Willis and Carol Massar

Aug. 29 (Bloomberg) -- The Federal Reserve will probably cut its benchmark interest rate to 4 percent as slowing U.S. economic growth restrains inflation, said Edward Hyman, chairman of International Strategy and Investment Group.

The worst housing slump in 16 years is weakening the economy after the Fed raised borrowing costs for two years through June 2006. A housing-industry survey conducted by Hyman's firm showed conditions are ``pretty bad'' and ``among the lowest ratings we have ever gotten,'' Hyman said.

``They will start to ease in a measured way, 25 basis points every meeting,'' he said in an interview in New York, referring to Fed policy makers. ``I think the economy will react favorably to it'' and probably avoid a recession, he said. A basis point is 0.01 percentage point.

Hyman, the top-rated economist on Wall Street by Institutional Investor for the past 27 years, predicted a ``better economy next year,'' with stocks and Treasury yields rising. In the meantime, slacker growth will ``put inflation aside'' as a concern for the Fed, he added.

As global credit markets seized up, the Fed on Aug. 17 lowered its discount rate. Traders are betting on a reduction in the federal funds rate, currently at 5.25 percent, at the next meeting of policy makers on Sept. 18.

As monetary policy is loosened, Hyman said, ``history tells me the stock market should be going straight up.''

Fed Deserves `Credit'

Hyman said past Fed rate increases worked ``beautifully'' in engineering an economic slowdown that put the brakes on inflation. ``You have to give them credit. I would give the Fed an A,'' he said.

It will take time for the economy to respond to interest- rate reductions, Hyman said, in predicting that growth would slow to as low as a 1 percent or 1.5 percent annual rate later this year before picking up in 2008.

``I don't think we will have a recession,'' he said. Still, judging from history, the housing recession could last another three years and subprime issues will linger, he said.

``It's going to get worse,'' said Hyman. ``The cuts in the rates will not do that much initially'' to ease the fallout from the subprime crisis.

He said job growth would probably slow further, providing another ``signpost'' that would lead the Fed to cut its benchmark rate and continue easing.

``We're buying a future right now,'' Hyman said. ``We're buying a better outlook for the U.S. economy with growth without inflation.''

To contact the reporter on this story: Bob Willis Washington at bwillis@bloomberg.net .