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US Federal Reserve set to cut rates amid jobs carnage
( 2001-12-10 10:47 ) (7 )

US Federal Reserve policymakers, fighting to drag the terror-shaken economy out of recession amid carnage in the labor market, are poised to cut rates for the 11th time this year.

Members of the Federal Open Market Committee (FOMC) meet on Tuesday to consider lowering interest rates after government figures showed the economy destroyed nearly 800,000 jobs in the past two months.

The unemployment rate soared to a six-year high of 5.7 percent in November from 5.4 percent in October, the government said Friday, shattering emerging confidence in a recovery.

Japan darkened the overseas horizon by sliding into its third recession in a decade. Gross domestic product contracted 0.5 percent in the third quarter after a 1.2-percent decline in the second quarter.

Economists forecast a cut in the key US federal funds rate of 0.25 percentage points, perhaps as much as 0.5 percentage points, in reaction to the deepening gloom.

"Another truly awful jobs report puts pressure on the Fed to move 50 basis points next Tuesday," Naroff Economic Advisors president and chief economist Joel Naroff said.

Friday's employment report showed the fallout from the September 11 terrorist attacks helped to evaporate 331,000 jobs. A total 468,000 were lost the previous month.

"This report was about as ugly as it gets," said Naroff.

"About the only thing remotely positive you can say about this report is that the employment data tend to be lagging indicators so maybe we are seeing the worst of the worst," he said.

"That, of course, is not something the Fed can take to the bank. The markets have been pricing in a 25 basis point decline but that small a move would seem silly in the face of the extreme weakness in the labor markets," Naroff added.

"There is no reason to leave the bullets in the gun, so a 50 basis point move looks to be the best bet when the FOMC convenes next Tuesday."

The Federal Reserve cut the key interest rate on November 6 by half a percentage point to 2.0 percent, the lowest level in 40 years, while leaving the door open to further easing.

It was the third 50 basis point cut since the suicide onslaught in New York and Washington, and the 10th since the start of this year, when the rate stood at 6.50 percent.

Economists at Wachovia Securities fell in line with the majority opinion on the market that the Federal Reserve will cut rates by a milder 0.25 percentage points.

"The economic news is no longer universally downbeat and that is giving rise to talk that the recession has possibly ended. It has not," the brokerage said in a report.

But there were some upbeat reports, it said, consistent with the widespread expectation of a US recovery in spring 2002.

Among the most bullish releases of the week, the National Association of Purchasing Management said Wednesday its index of non-manufacturing activity + principally the services sector + surged to 51.3 points in November from 40.6 in October.

It far exceeded market expectations: Wall Street had been tipping a rise to 43 points.

"Most analysts, including us, look for the Fed to cut the fed funds rate by 25 basis points to 1.75 percent," Wachovia said.

"That said, another 50 basis point cut can not be entirely ruled out. Fed officials have been falling over themselves in recent weeks talking about the weakness in the economy and how they are not worried about running out of ammunition," he added.

"However, our guess remains that the FOMC will opt for a 25 basis point cut."

Salomon Smith Barney economist Steven Wieting agreed.

The unemployment figures had sealed the fate of the Federal Reserve meeting, he said.

"We believe the Fed will still be compelled to ease 25 basis points at its meeting next week," he said.

"As the Fed tightened to a 6.5 percent fed funds rate in 2000, early signs of slowing were widespread. However, the Fed did not begin easing until those early warning signs turned into a marked deterioration," he added.

"We do not expect the Fed to stop easing until the current, early signs of recovery become concrete as well."