Expect Fed Interest-Rate Cut

Actors Susan Sarandon and Mandy Moore attend the 2007 annual "Do Something" Brick Awards at the Nokia Theatre in New York on April 10, 2007. Moore performed at the event, which honored young people who help others.
Output usually drops during an economic slowdown, but economists and economic policymakers will be putting in overtime this week, trying to figure how just how weak the economy is and what needs to be done about it.

The highlight is the two-day meeting of the Federal Open Market Committee, which concludes at 2:15 p.m. ET Wednesday with the announcement on interest rates.

Sentiment among Fed watchers has shifted noticeably since Alan Greenspan's testimony last week to the Senate Banking Committee, in which he said growth was "probably very close to zero."

Most economists are now predicting an aggressive 50-basis point cut in the Federal funds rate following the half-percentage point cut the Fed made on Jan. 3.

"It's a done deal," said David Wyss, chief economist for Standard & Poor's.

"When Alan Greenspan says growth is near zero, it means the Fed believes they need to do more," said Bruce Steinberg, chief economist at Merrill Lynch.

"Greenspan's negative spin on the economy strongly suggests that the Fed will continue its aggressive easing with a 50-basis point rate cut on Jan. 31," said Stephen Slifer, chief economist at Lehman Brothers.

Still, some believe the Fed will adopt a more gradual approach by lowering rates only a quarter percentage point.

Irwin Kellner, chief economist for and the Weller professor of economics at Hofstra University, wrote that the Fed won't have to move aggressively because the stock market has stabilized since the Jan. 3 cut and because tax cuts will do some of the Fed's work.

It's no secret that the financial markets are expecting a 50-basis point cut, but the Fed has often disappointed the markets. Why is it any different this time?

The markets have stabilized in large part because investors believe a 50-basis point cut is coming, said Steven Ricchiuto, chief economist at ABN Amro. Easier Fed policy going forward is the basis for the January rally. "What happens if the foundation isn't there?" he said.

In the short run, financial markets will certainly sell if the Fed's rate cut is only 25 basis points. In the long run, as long as the Fed keeps cutting rates, that foundation for recovery will be there. Wyss sees the Fed funds rate falling to 5 percent by the beginning of summer and "there's a shot we could go below that."

Jobs, Jobs, Jobs

It's also a very busy week for economic data, punctuated by the release of January's jobs report on Friday.

Economists surveyed by think job growth will slow to about 89,000 in January, pushing the jobless rate up to 4.1 percent. Wage pressures should moderate slightly, growing just 0.3 percent after several months of worrisome 0.4 percent gains.

Job growth will be weak "but not at recession levels," Merrill's Steinberg said. Ricchiuto argues that January payroll growth will look artificially strong because of "seasonal factor screwups.

In a normal January, the Labor Department would adjust job growth higher to account for seasonal job loses. But this year, "they didn't hire those seasonal workers" in the retail sector in the first place, which means the numbers will be adjusted higher than they should be.

The weak job growth estimates assume another month of losses in manufacturing payrolls, which should keep the National Association of Purchasing Management Index below 50 for the sixth straight month at about 43.3, very close to the level economists say signals a recession in the whole economy. The NAPM index is released Thursday at 10 a.m.

"Manufacturing is already in a recession," Wyss said.

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