Fed Might Not Be Done With Rates

WASHINGTON – The Federal Reserve, which has already cut interest rates more aggressively this year than at any other time under Chairman Alan Greenspan, may not be through yet.

But analysts are hopeful that the Fed's next move may send a signal that economic dangers are lessening a bit.

``My expectation is that the next move will be the last rate-cutting move,'' said Tim O'Neill, chief economist at the Bank of Montreal and Harris Bank.

O'Neill and many other economists believe Fed policy-makers will cut rates again at their next meeting on June 26-27. However, analysts have mixed opinions as to whether the cut will be by another half-point, or a more modest quarter-point.

On Wall Street, stocks opened lower Wednesday on worries about the economy but rose later in morning trading. The Dow Jones industrial average was up 90 points and the Nasdaq gained about 20 points.

After the Fed's rate announcement Tuesday, stocks had a muted reaction. The Dow finished the day down 4.36 points at 10,872, a sharp contrast to the 399-point rally triggered by the Fed's last rate move on April 18, which caught investors by surprise.

In the Fed's latest statement on interest rates Tuesday, policy-makers said they continue to believe that ``the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.''

Economists read that as the Fed holding the door open to further rate reductions.

``The Fed is ready to cut rates again by 50 basis points on June 27 if the business climate and labor markets do not show substantial improvement by then,'' predicted David Orr, First Union's chief economist.

For now, one of economists' biggest worries continues to be the status of the labor market in the coming months. If the nation's unemployment rate were to climb rapidly and companies were to continue to shed jobs, that could force consumers to cut back sharply on spending and tip the economy into recession.

In April, the unemployment rate shot up to 4.5 percent and businesses slashed jobs by the biggest amount since the last recession a decade ago. In March, the jobless rate ticked up a notch to 4.3 percent and payrolls fell sharply.

``For the Fed, jobs are job one,'' said Richard Yamarone, an economist with Argus Research Corp. ``Negative payroll growth is associated with all previous U.S. recessions, and the Fed wants to ensure that the recent downward trend in payrolls is reversed.''

That being said, most economists believe the Fed will cut interest rates enough to keep the economy from sliding into recession. But with the economic malaise continuing into the spring, many analysts don't foresee a significant rebound occurring until the final quarter of this year.

The economy grew at a 2 percent rate in the first three months of this year, but many analysts believe growth was slower in the current second quarter.

Treasury Secretary Paul O'Neill, in an interview with public television's ``Nightly Business Report'' conducted Tuesday morning before the Fed acted, expressed hope for more healthy growth later this year.

``I'm pretty optimistic, with the monetary policy that Chairman Greenspan is following, with the tax cut that I'm very hopeful we're going to see in place in the next 10 days before the 25th of May, ... that we're going to see a substantial move up,'' he said.

The Fed's action Tuesday, the fifth half-point reduction this year, pushed down the federal funds rate, the interest that banks charge each other, to 4 percent.

The string of rate cuts, which began on Jan. 3, has lowered interest rates by 2-1/2 percentage points in 4-1/2 months, the most aggressive easing campaign under Greenspan.

In contrast to this rapid-fire action, it took Fed policy-makers 14 months to accomplish the same amount of credit easing during the 1990-91 recession, the nation's only downturn since Greenspan took over as Federal Reserve chief in 1987.

Shortly after the Fed's rate cut Tuesday, the nation's commercial banks began announcing cuts to their prime lending rate, the benchmark for millions of short-term consumer and business loans, from 7.5 percent to 7 percent, the lowest since April 1994.

Fed policy-makers, in their statement, expressed continued worries about sagging corporate profits and business plans to slash spending on new plants and equipment, a driving force in the current expansion.

``The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward,'' policy-makers said.

Significantly, according to analysts, the Fed did not express worries that the recent jump in energy prices could lead to a wider breakout of inflation pressures, something that would restrain its ability to lower rates. ``With pressures on labor and product markets easing, inflation is expected to remain contained,'' the Fed said.