|
Cut to eisenhower rates Original Source Link: (May no longer be active)
http://www.upi.com/view.cfm?StoryID=20021101-045017-5759rhttp://www.upi.com/view.cfm?StoryID=20021101-045017-5759r
Odds on Fed cut to Eisenhower-era rates
By Frank Schnaue
UPI Markets Correspondent
From the Business & Economics Desk
Published 11/4/2002 10:06 AM
NEW YORK, Nov. 4 (UPI) -- The Federal Reserve, in an attempt to keep the economic recovery from fizzling, is expected to cut short-term interest rates Wednesday to the lowest level since Dwight David Eisenhower sat in the Oval Office in the late 1950s.
The Fed is expected to trim the key federal funds rate, which influences borrowing costs throughout the economy, by one-quarter percentage point to 1.50 percent, its lowest level since the nation's top bank was offering the overnight loan at 1.50 percent rate in May 1959.
Michael Moskow, president of the Federal Reserve Bank of Chicago said last week, "The economy is facing many challenges." These include a glut of capacity that suggests spending on new factories and equipment "may take some time" before returning to levels seen before the recession," Moskow said.
The nation's top bank cut its target for short-term rates 11 times in 2001, a record for a calendar year, to fight the effects of a recession that likely began in last March and was worsened by the Sept. 11 terror attacks. The central bank cut rates at each of its eight scheduled meetings last year and during three impromptu conference calls.
Three of the reductions occurred after the Sept. 11 terrorist attacks in New York and Washington. The Fed has opted to leave rates unchanged at its policy meetings this year heading into Wednesday's closed-door session.
Doug McAllister, senior vice president at Prudential Securities, said, "Weak economic news will likely move the Fed to ease by 25 basis points." Analysts said speculation the central bank would trim rates were fueled after the Conference Board reported last week that consumer confidence, which had declined for four consecutive months, deteriorated further to a 9-year low in October.
Lynn Franco, director of the Conference Board's Consumer Research Center, said, "A weak labor market, the threat of military action in Iraq and a prolonged decline in the financial markets have clearly dampened both consumers' confidence and their expectations for the near future."
Meanwhile, expectations on Wall Street that the Fed will cut interest rates to keep the economic recovery from fizzling were also fanned by news that employers trimmed their payrolls for a second consecutive month in October. Non-farm business payrolls declined by 5,000 in October after a 13,000 decline in September, according to the Labor Department. The unemployment rate rose by 1-10th of a percentage point to 5.7 percent as a result. Workers' wages, meanwhile, grew sluggishly -- more evidence that the risk of inflation is remote.
The numbers surprised Wall Street, which had expected an increase of 5,000 in payrolls and an unemployment rate of 5.8 percent. The employment report also validated the Fed's view that inflation risks remain tame. Average hourly earnings rose 3 cents, or 0.2 percent, to $14.89 in October after a 0.2 percent increase in September. The average work week shrunk, a sign of slowing economic activity. In October, the week lasted 34.1 hours, down six minutes from September.
Frank W. Slusser, senior market analyst at Standard & Poor's MarketScope said, "Although the payrolls report wasn't a screaming endorsement for a rate cut, it was fairly weak and confirms a stagnating job market."
And, the Commerce Department reported consumer spending on goods and services posted its first decline in 10 months during September, falling 0.4 percent after rising 0.4 percent in August. Economists had expected spending to decline 0.2 percent.
"Companies expect spending to keep weakening as consumers, worried about the state of the economy, save more of their additional income," Slusser said.
Meanwhile, manufacturing, which accounts for about 1-6th of the economy, contracted for a second consecutive month in October as production declined. The Institute for Supply Management's manufacturing index dropped to 48.5 in October, the lowest reading this year, and down from 49.5 in September.
Analysts said falling confidence has raised doubts about the strength of consumer spending, the biggest part of the economy. That's why manufacturers are reducing production and firing workers.
Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee said, "The manufacturing sector continued its recent trend as it lost momentum again in October. The sector lacks drivers at this point. While New Orders are relatively unchanged, the uncertainty with regard to terrorism and potential military action continue to add to the stagnation. Capital spending for additional capacity and IT is very soft. It appears that manufacturing employment is significantly lagging other recoveries."
And, the National Association of Business Economics said its survey of 108 members found that while firms were reporting "stronger rising demand than last quarter," they had become "even more cautious about hiring and spending" as profit margins continued to shrink. Other evidence of economic weakness came from a report by the Bank of Tokyo-Mitsubishi Ltd., which said holiday season sales will rise 2 percent to 3.75 percent this year. Last year sales rose 2.2 percent, the smallest gain since 1997.
Franco said, "The outlook for the holiday retail season is now fairly bleak. Without the likelihood of a pickup in consumer spending, an already weak economic recovery could weaken further." Sonja Rudd, analyst at Wall Street Capital Funding LLC in Weston, Florida, said, "Consumer confidence is showing a 9-year low. However, consumers may say they are not confident, but they are still spending like there is a party going on somewhere. Autos, homes and durable goods are still holding their own in monthly consumer tallies.
"I guess with zero-percent financing being extended by GM, Ford, and other major auto makers, along with low mortgage rates, enough consumers have spent in these two areas to help keep the economy afloat," Rudd added.
McAllister said, "With the Fed biased to ease, further economic weakness will likely move the Fed to lower interest rates in a effort to preclude the domestic economy's slipping back into a recession. Some analysts have begun to argue that the central bank committee may decide on a more dramatic move and lower fed funds by 50 basis points."
Prudential Securities Treasury analyst Michelle Girard agrees with McAllister's view of a 25-basis-point cut and not with the 50-basis-point assessment.
"With fed funds at 1.75 percent, the Fed's options are limited. If it were to choose to lower interest rates by 50 basis points and the economy continued to weaken and the need for additional easing continued, the Fed would have even less maneuverability," Girard said.
"The Fed believes that much of the economy's malaise is due not to a lack of liquidity but to uncertainties over which it has no control -- such as political tensions and corporate governance," Girard said. U.S. preparations for military action against Iraq are adding to investors' concerns.
The Blue Chip Economic Indicators survey released last month showed the economy may expand at a slower pace through mid-2003 than projected just a month earlier, as a slide in stock prices damps consumer and business spending.
Economic growth will slow to a 2.2 percent annual rate in the final three months of this year, 0.7 percentage point less than expected a month ago, according to the consensus estimate of 51 economists in the survey. The 3.1 percent growth pace expected for the first quarter of next year is lower than the September forecast of 3.4 percent.
And, the nation's economy, as measured by the gross domestic product, expanded at a slower-than-expected 3.1 percent annual rate in the third quarter following a 1.3 percent rate in the second quarter, according to the Commerce Department. Economists had expected third-quarter growth of 3.7 percent.
Although the economy grew at a healthy clip during the quarter, retail sales and the strength of the manufacturing sector suggested the economy slowed toward the end of the quarter. Many believe the economy is growing at an even slower pace in the fourth quarter, at a pace of about 2 percent to 2.5 percent.
The Federal Open Market Committee has eight regularly scheduled meetings per year to direct the conduct of open market operations by the Federal Reserve Bank of New York in a manner designed to foster the long-run objectives of price stability and sustainable economic growth.
The Fed's decision on rates is expected on Wednesday at approximately 2:15 p.m. EDT., and it will have its final meeting of the year Dec. 10.
Copyright © 2002 United Press International
|
|
