Posted on: Tuesday, May 15, 2001

Fed expected to trim interest rates again

By Martin Crutsinger
AP Economics Writer

WASHINGTON — The Federal Reserve, which has cut interest rates four times this year trying to stave off a recession, is expected to reduce rates still further today.

Many economists, but not all, believe the rate cut will be half a point, which would match the size of the previous four as the Fed staged its most aggressive rate-cutting effort since Chairman Alan Greenspan took office in 1987.

"The risks to the economy are still mostly on the downside. The Fed is trying to fight any threat of the economy slipping into a recession," said Stuart Hoffman, chief economist for PNC Financial Services Group of Pittsburgh.

Underscoring current weakness, the government yesterday said the nation's industrial output fell in April for a seventh straight month, a 0.3 percent decline that dashed hopes the hard-hit industrial sector was staging a rebound.

"The good news is that these numbers all but guarantee that the Fed will cut rates again on Tuesday," said Jerry Jasinowski, president of the National Association of Manufacturers, who said America's beleaguered manufacturing needs another half-point Fed rate cut.

However, some private economists said the Fed may decide to revert to its more normal quarter-point rate cuts, especially in light of some recent better-than-expected economic news.

The government reported last Friday that retail sales jumped by 0.8 percent in April, a solid rebound after two consecutive declines. At the same time, the University of Michigan's preliminary survey of consumers showed sentiment rose in early May to the highest level since January.

Lynn Reaser, chief economist for Banc of America Capital Management Inc. in St. Louis, said the upturn in the attitudes of consumers, whose buying accounts for two-thirds of the nation's economic activity, probably would cause the Fed to opt for just a quarter-point move at their May meeting.

The central bank last cut rates on April 18 after an emergency telephone conference call convened by Greenspan, the second time this year the Fed took the unusual step of changing rates outside its normal meeting schedule.

That move took a battered Wall Street by surprise and helped halt a steep selloff in stocks as investors gained confidence the economy will avoid a recession with a rebound in the second half of this year.

The stronger growth is not expected to return soon enough to keep the unemployment rate from rising further. In April, the jobless figure jumped to 4.5 percent as companies shed the largest number of jobs in a decade.

The immediate worry is that further layoffs will again shake consumer confidence and cause the hoped-for rebound to stall out.

"There is no indication that things are getting better in the job market," said Mark Zandi, chief economist at Economy.com, a West Chester, Pa., forecasting firm. "If the lost jobs and weaker income gains cause consumers to ratchet down, the economy could quickly fall into a recession."

Zandi said he believed even if the economy begins to rebound this summer, the unemployment rate, which fell to a 30-year low of 3.9 percent last year, could well rise as high as 5.5 percent by the end of this year.

That is why many economists believe a rate cut today would not be the year's last.

Many forecast a sixth rate cut at the Fed's June 26-27 meeting, although some said the move might be a quarter-point reduction, especially if the Fed signals a belief that it has finally done enough to boost economic growth without further rate cuts.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said the Fed may conclude a year from now that its final two rate reductions in this easing cycle were unnecessary and in fact had acted with tax cuts passed by Congress to overheat demand and raise inflation pressures next year.

"I think one more rate cut in June will be it for the Fed. After that, inflation is going to become more of a concern," Sohn said.

He predicted the economy, which grew at a sluggish annual rate of just 2 percent in the first three months of this year, is probably growing at an even slower 1 percent to 1.5 percent rate in the current quarter. But he forecast a rebound to 3 percent growth in the second half of this year as interest-sensitive sectors of the economy such as housing and autos respond to the Fed easing that began in January.