INTEREST RATES Another reduction coming?

The threat of deflation now looms over the economy.
WASHINGTON (AP) -- Americans could see short-term interest rates, already at a 41-year low, decline more next month if the struggling postwar economy doesn't show clear signs of a revival, economists say.
Federal Reserve Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee, which sets interest rate policy in the United States, opted Tuesday to hold interest rates steady. But policy-makers opened the door to a possible rate reduction at their next meeting June 24-25.
Already worried about sluggish growth, Fed policy-makers raised a new concern -- that the country could face deflation, a prolonged bout of falling prices. Though they indicated the chance of this was remote, it still represented a possible threat to the economy.
"Evidently the Federal Reserve believes that the economic rebound won't be strong enough to allay deflation concerns," said Sung Won Sohn, chief economist at Wells Fargo. The probability that the Fed will cut the funds rate at its June meeting "has increased significantly," Sohn said.
Prediction
Depending on how the economy fares between now and then, Merrill Lynch economist Gerald Cohen said, the Fed might cut its most influential short-term interest rate by a quarter-point in June and perhaps another quarter-point in August.
Economists view deflation as a far more serious threat than inflation because interest rate changes have only a limited impact once a deflationary spiral begins. America's last serious deflation occurred during the Great Depression of the 1930s.