A FAVOURABLE economic environment in the United States will spur a bull run in the equity market accompanied by gradual cuts in interest rates, according to Lehman Brothers chief global economist Allen Sinai. The Dow Jones Industrial Average would rally up to 5,100 points in the next six months with limited downside risk, he said. Mr Sinai has been periodically consulted by the Clinton Administration on key economic issues and often testifies before the US Congress. His optimism is based on his forecast of a more 'friendly' interest-rate environment, lower inflation and the possibility of easing the Federal Reserve's grip on rates. However, split opinion in the Federal Reserve would only result in a mild rate cut by year-end of about 25 basis points, or a quarter of a percentage point. He said some members in the Federal reserve were happy to see economic growth of between two and 2.5 per cent and inflation at about the same rate. Although he was uncertain about when the decision on the rate cut by the FOMC (Federal Open Market Committee) would be made, either on November 15 or December 19, Mr Sinai was confident that interest rates would decrease by half a percentage point by next year. The rate cut would be 'either in response to deficit reduction and outyear budget-balancing or to minimise the risk of an underperforming economy given a low two per cent to 2.5 per cent rate of inflation,' he said. He expected the federal fund rate to be at 5.5 per cent by the end of this year, five per cent by the end of next year and 4.8 per cent in 1997. Hong Kong's stock market has benefited from the positive outlook on rates. Unlike in some 'black' Octobers, when stock markets crumbled, diminished earnings growth this time has not been accompanied by a tighter Fed policy, rising interest rates and other conditions that set the stage for a recession. Low inflation in the US, between two and 2.5 per cent, would boost the equity market, the dollar and the fixed income markets. Mr Sinai expected the dollar to rise against the yen and deutschemark. While the fundamentals looked favourable for the dollar, the only uncertainty is the trade and current deficits. 'Near-term, 98-102 is expected on dollar-yen, then an upturn to over 105,' he said. Although the cyclical upturn against major currencies favour the US dollar, EMU affirmation in Europe may hurt the dollar. This was 'because of the strict criteria set by Germany for entry by weak currency countries', according to Mr Sinai. The 30-year US Treasury bond yield is forecast to tilt down toward six per cent, within a broad range of between 5.75 and 6.75 per cent according to Mr Sinai.