Rate cuts may still be in the offing Move by Fed possible despite signs of rebound, analysts say.

May 11, 1992|By Kenneth N. Gilpin | Kenneth N. Gilpin,New York Times News Service

NEW YORK -- Even though recent economic data point to a recovery, a number of credit market analysts continue to assert that the Federal Reserve Board may cut short-term interest rates again by early June.

The prospects for another Fed easing seemed to dim last week after the Labor Department reported that non-farm payroll employment rose by 126,000 jobs last month and that the unemployment rate slipped a notch, to 7.2 percent.

The rise in employment was a bit larger than most economists had expected and was seen by some as evidence that the underpinnings of a recovery are now on solid ground.

"These numbers are very encouraging and consistent with the thought that they are going to do better," said Robert A. Brusca, chief economist at Nikko Securities.

But others noted that the report contained mixed signals: job growth, although encouraging, was concentrated in a few service sectors. Moreover, a decline in average hourly wages suggested that consumers would have to spend cautiously.

"There were parts of this uneven report that were weaker than I would have guessed," said Donald J. Fine, chief market analyst at Chase Manhattan Bank. "The recovery has not yet turned into an expansion."

Weak growth in the money supply, particularly M-2, the aggregate most closely followed by the Fed, is another worry, some analysts said.

For these reasons, expectations of another Fed credit easing "are better deferred than abandoned," Susan Hering, an economist at Salomon Brothers, wrote in the firm's weekly Comments on Credit.

For the Fed to be convinced that another cut in the overnight federal funds rate is necessary, said Donald H. Strazheim, chief economist at Merrill Lynch & Co., it would need to see continued weak money growth, lower inflation and weak economic data.

Leonard J. Santow, a managing director at Griggs & Santow Inc., a financial consulting firm, predicted that the next round of economic reports would help tip the balance toward another Fed easing.

"When all is said and done, the reports will show the economy did not look that robust in April," Mr. Santow said. "The numbers for January and February gave an unrealistic sense of what was going on."

Even as they acknowledged that economic data and political pressures might force the Fed's hand, some questioned what another quarter-point cut in the funds rate, to 3.5 percent, would accomplish.

A cut in the funds rate would almost certainly prompt commercial banks to lower their prime lending rates by half a percentage point. But a lower prime would probably not generate a surge in loan demand, Mr. Fine said.

What could have a salutary effect on bond yields, some analysts said, would be the passage by Congress of a constitutional amendment to balance the federal budget, which is under discussion.

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