Interest rates may be cut further, experts predict
By Siobhan Hughes and Alex Tanzi
Bloomberg News Service
WASHINGTON — A volley of reports that show a weakening economy makes it likely that Federal Reserve policy-makers will signal tomorrow that a reduction in interest rates may be necessary in coming months, economists said.
The U.S. economy is showing signs of stalling as manufacturing declines and unemployment lines lengthen, reports this week are likely to show.
"It's clear that momentum has changed," said Robert Gay, an economist at Commerzbank Securities Inc. in New York. Manufacturing and retail sales are "fizzling, and that puts us in a very precarious position."
The central bank's decision-makers are expected to keep the benchmark interest rate at 1.25 percent after their meeting tomorrow. Economists surveyed by Bloomberg News expect them to take a step toward lowering the overnight rate by saying the risks of a slowdown outweigh the threat of inflation. In a Bloomberg News survey of 56 economists, 10 are forecasting a reduction to 1 percent, while the others expect no change.
The job market is weakening again. The Labor Department is expected to report on Thursday that the number of U.S. workers filing new claims for state unemployment benefits totaled 415,000, based on the median of 26 economists' forecasts. The previous week it was 420,000, marking the longest series of readings above 400,000 since March-May of last year.
Declining production and rising jobless claims may be setting the stage for a slowdown in economic growth. The Conference Board's leading economic indicators index, a gauge of the direction of the economy in the next three to six months, probably fell 0.4 percent in February after dropping 0.1 percent in January, a Bloomberg survey found. The report is due for release Friday.
Economists already have been scaling back forecasts for economic growth. The economy probably will expand 2.6 percent this year, based on a consensus of 54 economists in the March 10 Blue Chip Economics Indicators survey. That's down from the 2.7 percent growth they forecast a month ago.
A recent surge in energy costs is one threat. The consumer price index, the most widely followed gauge of inflation, probably rose 0.5 percent in February as gasoline and natural gas prices surged, economists said.
The Labor Department releases the report Friday. Excluding food and energy, the index probably rose 0.2 percent, suggesting prices for most other goods and services are tame.
Colder-than-usual weather in February probably put a dent in home construction. Builders probably broke ground on new homes at a 1.73-million-unit annual pace last month, the slowest since October, based on the median of 44 forecasts in a survey by Bloomberg News. Tomorrow's report is projected to show building permits probably dropped to 1.745 million from 1.779 million.
The U.S. government's finances are deteriorating as a result of the weak economy. The monthly budget deficit for February probably broadened to $97.7 billion from $76.1 billion in the same month last year as rising unemployment held down income tax receipts and spending rose.
