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Fed Seen Lowering Rates
In 'Recovery' Rescue Bid

By Glenn Somerville
11-3-2

WASHINGTON (Reuters) - A run of bad economic news last week has U.S. economists all but certain Alan Greenspan and the Federal Reserve will lower borrowing costs on Wednesday to rescue a recovery in peril of grinding to a halt.
 
"The economy's stalled," said economist Mark Zandi of Economy.com in West Chester, Pennsylvania. "The risks are high and rising that the recovery may unravel back into a recession. If the economy's growing at all now, it's barely, and it needs help."
 
Reports on Friday showing a drop in the number of jobs for the second straight month in October and reduced activity on factory floors cemented a virtual consensus the Fed will announce after its Wednesday meeting it is cutting rates for the first time this year to try to stimulate activity.
 
The U.S. central bank's policy-making Federal Open Market Committee, which has kept the federal funds rate steady at a four-decade low of 1.75 percent so far this year, is widely expected to agree on a reduction.
 
In a Reuters poll taken after the employment report, fully 21 of 22 primary Wall Street dealers -- firms that deal directly with the Fed -- foresaw a rate reduction, with 15 anticipating a one-quarter percentage point trim and six looking for a larger half-point cut.
 
The result is a dramatic shift from the last Reuters survey on Oct. 7, when the economic news less uniformly worrying and just six dealers expected a November cut.
 
Pressure around the Fed's boardroom table for easier monetary policy began to ratchet up at the last policy-making meeting in September, with two voting members pressing for a rate cut. The majority, however, opted to keep rates steady.
 
Zandi said Greenspan faces some special pressure to keep the economy from slipping back into recession. The venerated Fed chairman is a vocal advocate of the benefits of productivity growth and a renewed slump could throw into jeopardy the technology-driven acceleration in hourly worker output that has been a highlight of his Fed tenure.
 
The 76-year-old Fed chief may be conscious of the history book factor as well. After 15 years at the helm of the U.S. central bank, Greenspan is likely anxious to preserve the economic gains made during the 1990s boom that are the foundation of his legacy.
 
"He has to worry about the danger of the country slipping into a lengthy economic malaise," Zandi said, "I think he hopes that his legacy will be that he raised all Americans' living standards but that's something that could quickly get lost the longer that current economic problems last."
 
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ABRUPT DECELERATION
 
Greenspan and the Fed cut interest rates 11 times last year and, until recently, the economic recovery from last year's recession had looked on track, although slow and uneven.
 
The reversal of economic fortune, after a relatively strong third quarter in which the nation's gross domestic product grew at a respectable 3.1 percent rate, came swiftly.
 
"There's been a real downshift in growth late in the summer and in the early fall with clear indications the manufacturing sector already has fallen back into recession," said economist Allen Sinai of Decision Economics Inc. in Boston, adding that prospects for a significant pickup seem to be retreating to as late as possibly 2004.
 
The private Institute for Supply Management said on Friday its factory index fell to 48.5 in October from September's 49.5. A reading below 50 shows a shrinking manufacturing sector.
 
"The picture right now is depressing," Sinai said. "The odds are now eight out of 10 that at best we're going to see sluggish growth for the next several quarters -- basically a sluggish, jobless economy like we had back in 1992 and 1993 and at worst a fall back into recession."
 
Despite the divisions on the FOMC at the Sept. 24 policy session, economists say this time there seems to be nothing to stop a rate cut.
 
"Here's what the Fed sees: we're in a patch of soft economic data and inflation is very low so the Fed has the flexibility to ease and is very likely to ease," said Mickey Levy, an economist with Bank of America in New York.
 
CONSUMERS DISPIRITED
 
Levy added the main advantage of quarter-percentage-point cut would be to give "a psychological boost" to financial markets, something that would help lift the spirits of consumers who have been a mainstay for the economy so far.
 
There were fresh signs on Friday that consumers needed a morale boost, as auto makers reported a second consecutive month of steep declines in new-car sales last month from year-earlier levels.
 
Economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis, Mo., agreed that Fed policymakers likely feel the need to arrest an apparent loss of economic momentum, much of it arising from uncertainty stemming from factors as diverse as concern about possible war with Iraq and job fears.
 
"On balance, if the (unemployment and ISM numbers) today had been more positive, the Fed likely would have remained on hold since the economy's long-term prospects remain basically positive and monetary policy already is accommodative," she said.
 
"There is no need for panic at this time, but from the Fed's point of view some insurance may be appropriate," said Reaser, who forecasts a quarter percentage point cut in the federal funds rate on Wednesday.
 
 
Copyright © 2002 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.





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