Fed's bleak survey may raise chances of interest cut

By Martin Crutsinger
Associated Press

WASHINGTON — The Federal Reserve Board painted a somber picture of weak retail sales, tough times in manufacturing and a lackluster job market in its latest survey of business conditions.

Many analysts said the report released yesterday increased the chances that the Fed will cut interest rates in November.

Compiled from information supplied by the Fed's 12 regional banks, the survey depicted an economy that was battered in September and early October by a host of problems, from a plunging stock market to the West Coast dock shutdown.

The Fed's regional bank in Dallas, for example, reported that business contacts "were significantly more pessimistic about the outlook for growth through the rest of the year, citing concerns about war, terrorism, the dockworkers' (shutdown) on the West Coast, declining stock market and upcoming elections."

Fed policy-makers will meet Nov. 6, the day after voters go to the polls, to set interest rates.

The Fed has left its benchmark overnight borrowing rate at a 40-year low of 1.75 percent since last December, when it made the last of 11 rate reductions aimed at lifting the country out of recession.

However, this year's recovery has proceeded in fits and starts as businesses have remained hesitant to increase spending to modernize and expand production in the face of weak demand, a disappointing stock market and falling consumer confidence.

The expectation of a possible Fed rate cut increased since the Fed's last meeting on Sept. 24, when two Fed policy-makers dissented from the majority decision to leave rates unchanged.

Analysts were struck by the bleak tone of the Fed survey, which is prepared eight times a year to give policy-makers a look at business conditions around the country before their interest rate meetings. The document is known as the "Beige Book" for the color of its cover.

"I can't remember the last time the Beige Book was this pessimistic. It reflects the weak economy we have been experiencing," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Sohn said he believed the Fed would cut rates by a half-point — not its usual quarter-point — at the November meeting in an effort to restore confidence to a battered Wall Street.

Other analysts were not as certain of a rate cut, arguing that the Fed may be content to leave rates alone if the stock market rally of recent days continues. The low rates have already proved a boon to home and auto sales and mortgage refinancing.

The survey said many Fed districts reported continued weak demand in the hard-hit manufacturing sector, describing conditions in various industries as "tough," "stagnant" and "sluggish."

The survey found that retail sales were weak in many districts, with auto sales cooling off after a surge earlier this year triggered by attractive financing deals.

The Chicago, Dallas, Kansas City and San Francisco districts all reported that retail sales had slowed in the past two months.

The Fed survey found that the job market remained "lackluster, with only a few reports of increased hiring."