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Economists and analysts expect the Fed will reduce rates today, while signaling the end of its yearlong reduction plan.
By TIMES WIRES
© St. Petersburg Times, published December 11, 2001
WASHINGTON -- The Federal Reserve, faced with an economy now officially suffering through a recession and shedding jobs at the fastest pace in two decades, is widely expected to cut interest rates today for the 11th time this year. But many economists think the central bank will also signal that its aggressive credit lowering is drawing to a close.
Economists expect the Fed's policymakers to trim short-term interest rates by a quarter of a percentage point. Such a move would bring the benchmark federal funds rate on overnight loans between banks to 1.75 percent, its lowest since the early 1960s.
Analysts said the stock market had already priced in a quarter-point reduction, and they noted that trading in futures contracts on the federal funds rate reflected a 100 percent chance of such a cut. As such, they said, investors are expected to place greater emphasis on the Federal Reserve's statement about the strength of the economy.
"What the market would like to see is the Fed indicate that this is the last cut," said Peter Cardillo, chief strategist and director of research at Global Partner Securities Inc., formerly Westfalia Investments. "That would boost investors' confidence in the sense that investors would feel comfortable that the Fed feels confident that the economy is about to turn."
With no economic news Monday and few announcements from corporate America, each of the three major indexes ended the day in negative territory.
The Dow Jones Industrial Average lost 128.01 points, or 1.27 percent, to 9,921.45. The technology-weighted Nasdaq Composite Index fell 29.14 points, or 1.44 percent, to 1,992.12. The broader Standard & Poor's 500-stock index dropped 18.38 points, or 1.59 percent, to 1,139.93.
Some analysts had thought that the central bank might decide to leave rates unchanged at its final meeting of the year given some tentative positive signs, such as stronger-than-expected auto sales in October and November and a big jump in factory orders. Those views changed Friday, when the government reported that the unemployment rate shot up to 5.7 percent in November as another 331,000 Americans lost their jobs. That brought total job losses during the past two months to 800,000, the largest total in 21 years.
"Given the dismal unemployment report, a quarter-point cut is a fait accompli," said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.
The Fed's moves have pushed market rates down as well, with the prime lending rate, the benchmark rate for millions of consumer and business loans, now at 5 percent, the lowest level since June 1972. The prime stood at 9.5 percent when the year started.
Many analysts think that while the central bank will leave the door open for further rate cuts early next year, the move back to a quarter-point instead of a half-point move will signal that the Fed thinks it has done enough to guarantee an economic rebound by the spring. However, David Jones, chief economist at Aubrey Lanston & Co., did not rule out the possibility that the Fed might decide to cut rates one more time by a quarter-point, perhaps in January, before the next regularly scheduled meeting on Jan. 29-30.
"All things considered, the Fed would rather be safe than sorry, so they will leave room for more rate cuts," Jones said, noting several recent comments by Fed officials that they have seen no clear signs yet of an economic rebound.
Other analysts said the Fed's move may also be governed by whether Congress and President Bush can resolve their differences and gain passage of an economic stimulus bill. The administration is pushing a package weighted toward tax cuts for corporations and individuals, while Democrats favor a plan that would provide more help to low-income people and the unemployed. Talks broke down Friday. Talks are expected to resume this week.
Private economists said the inability to win congressional passage of a stimulus bill is probably one of the key factors influencing the Fed's decision to cut rates further and hold open the possibility of further rate cuts. "The Fed is trying to determine how close we are to the end of the recession and whether they are going to get any help from Congress and the administration," said Mark Zandi, economist at Economy.com.
Even with further Fed rate cuts, analysts said, long-term rates, which are set by financial markets, have probably seen their lows. The rate for 30-year mortgages hit a three-decade low of 6.45 percent in early November, triggering a wave of mortgage refinancings. That rate now stands at 6.84 percent and analysts said it will probably head higher as signs of a recovery become more solid.
-- Information from the Associated Press and New York Times was used in this report.