Economist Albert Wojnilower of First Boston Inc. predicted today that the Federal Reserve will cut its key lending rate further this month "as a sort of Christmas present," because of a "profound weakness" in business capital spending and world trade.
Henry Kaufman, chief economist at Salomon Brothers -- whose interest-rate forecasts, like Wojnilower's, have both boosted and battered the nation's financial markets at times--predicted today that interest rates will drift lower during at least part of 1983, but that a rebound in the nation's economic fortunes "will be one of the weakest on record."
Wojnilower said that, although there are signs of improvements in retail sales and housing that may bring the economic downturn to an end, there is "virtually no danger of any rebound in interest rates."
He predicted that the Fed would cut the discount rate by a half point to 8 1/2 percent by the end of the month. Further discounts in the rate paid by banks that borrow from the Fed ultimately will push it to a bottom between 7 and 8 percent, he said.
But Kaufman said he foresees no deep decline in rates. Without "extraordinary economic weakness," it will be "very difficult" to lower real interest rates significantly at a time when virtually all interest-rate ceilings have been removed and financial instruments are being deregulated, he said.
This deregulation -- "from the housing market to the consumer market, from the deposits of small savers to investments for large institutions" -- has produced an intensely competitive market that forces institutions to bid rates up to get business, he indicated.
Both Kaufman and Wojnilower expect a very slow recovery next year. The gross national product is likely to rise by only about 2 percent next year, after allowing for inflation, Kaufman said. "It is not clear that a lift of 2 percent in real growth can adequately sustain and keep an economic recovery going," Kaufman told reporters.
According to Kaufman's annual economic outlook, the housing industry will be the only sector of the economy to record signficant growth next year. Kaufman said housing starts will rise about one-third to about 1.35 million next year. Also on the positive side, Kaufman said that the nation's inflation rate is likely to fall to about 5.2 percent next year from about 6.3 percent in 1982.
"Household consumption will climb sluggishly, as the rate of personal saving remains high in the face of continuing widespread umemployment," he said.
Moreover, according to the Kaufman forecast, nonresidential business' capital spending is likely to decline by 6 percent next year, while industrial capacity utilization will continue at post-World War II lows.
Some of his toughest language was in warnings about the deficit. He said it could be as high as $190 billion next year, which may be a "deterrent" to "interest rate stability" and "significant economic revival."
The Reagan administration should abandon 1983 tax cuts, remove all indexation from federal programs, and encourage a similar move by private sector employers. "All of us should be at risk when it comes to inflation," he said.
In light of that deficit, and under current federal policies, the decline in interest rates "may terminate and reverse the downward direction. That is a risk that will sit in the marketplace unless government policy shows better communication and unification," he said.