Fed cut to 4% expected today

Half-point move might, or might not, be year's final easing

May 15, 2001|By William Patalon III | William Patalon III,SUN STAFF

The Federal Reserve is widely expected to cut a key interest rate by half a percentage point, to 4 percent, when central bank policy-makers meet today.

But whether there are future interest rate cuts in the cards will depend on just how strong or weak the economic reports are over the next few weeks, economists and market analysts say.

"It's interesting to see a glimmer of hope that the economy might be forming a bottom here [with] the strong retail sales numbers we had last week," Jonathan Murray, first vice president of investments at Legg Mason Inc. in Baltimore, said yesterday. "But with all the layoffs and the weak corporate profits, it would seem there are reasons for the Fed to ease going forward."

Recent economic numbers have been a decidedly mixed bag. Last week's retail sales report showed sales shot up by 0.8 percent in April after declining for two straight months - an important development since consumer spending drives two-thirds of the U.S. economy. Consumer sentiment also is improving. The University of Michigan's preliminary consumer sentiment index, an indicator of how consumers feel about the economy, rose to 92.6 in May from 88.4 in April after months of declines.

But the Fed reported yesterday that production at factories, mines and utilities fell 0.3 percent in April after falling a revised 0.1 percent decline in March. That indicator has fallen for seven straight months, the longest string of negative news in that area since 1982. And last week the Labor Department reported that worker productivity fell in the first quarter for the first time in six years.

Most economists and analysts unanimously agree that the Fed will ease by a half-point today and that anything less is almost sure to spark a steep sell-off in stock prices.

"We think the Fed will cut rates half a point" at its meeting today, said Gary Thayer, chief economist for A. G. Edwards in St. Louis. "The economy is still very weak."

Some experts believe that the improvements in some of the economic reports are enough to perhaps make this the last rate reduction for some time. Fed policy-makers already have reduced interest rates by half a percentage point four times this year, bringing the benchmark federal funds rate to 4.5 percent. Those are aggressive moves for the Alan Green- span-led Fed, which has been known for incremental moves.

Other economists believe there is room for more rate cuts.

"Unless there is some clear indication [that the economy has really improved], the Fed is going to have to be somewhat helpful," said Joel Naroff, head of Naroff Economic Advisors in Holland, Pa. "At this point in the cycle, 4.5 percent is not terribly accommodative" to an economic turnaround.

One early indicator of the central bank's intentions about future interest rate moves could be in what it says today about the economy in the statement that accompanies any interest-rate move. Comments about a continued weak economic environment would hint at the potential for subsequent interest rate cuts.

The outlook for jobs also will be an important guide. The U.S. unemployment rate rose to 4.5 percent in April, up from 4.3 percent in March and the highest it's been since October 1998.

Employers pared their worker ranks by more than 220,000 in April, the biggest reduction since February 1991.

Continued job losses could prompt the Fed to continue its rate-cutting campaign, said Richard Yamarone, chief economists for Argus Research Co. in New York City.

"With the Fed, jobs are Job 1," Yamarone said.

Yamarone and other economists think the central bank could cut rates again at its next meeting of policy-makers, scheduled for June 26-27. Should some singularly bad news surface before then, cuts could come sooner, some economists say.

Bloomberg News and Reuters contributed to this article.

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