There's been a lot of bad economic news in the past week, prompting two major investment banks to call for a Federal Reserve interest rate cut by the end of the year.

Wall Street's thinking has shifted significantly since the middle of July. A majority of U.S. primary dealers, who deal directly with the Fed in open markets, now expect rates will be left untouched for the rest of this year in face of troubled financial markets and signs the U.S. recovery may be in jeopardy.

A Reuters survey of 19 primary dealers taken on Friday after another disappointing payrolls report found 17 expect no increase in the 1.75 percent federal funds rate this year, up from 13 in a similar survey just over two weeks ago.

And the dealers, who deal directly with the Fed, put the chance of an actual cut in interest rates to support flagging growth at 33 percent. Two houses -- Goldman Sachs and Dresdner Kleinwort Wasserstein -- expect a rate cut this year.

After a spate of weak readings -- on consumer confidence, manufacturing and factory orders, and employment -- most analysts believe the Fed is likely to keep rates at four-decade lows well into next year to try and bring some pep back into a flagging recovery.

"There are signs here the recovery is stalling, and the payroll report increased those concerns, no doubt about it," said Banc One senior financial economist Anthony Karydakis.

Official figures on Friday showed the U.S. economy generated a meager 6,000 new jobs in July, around one-tenth of what economists had expected, raising comparisons with the last "jobless recovery" from the 1990-91 recession.

Many believe the Fed could stand pat into the second quarter of 2003, echoing the long period following the recession of the early 1990s when the Fed left rates low for about 17 months.


But one influential investment bank, Goldman Sachs, Friday aggressively revised its outlook for Fed policy, predicting 75 basis points of easing by year's end.

"Although Fed officials undoubtedly share our view that a double dip is not the central case, we believe they will want to take out more insurance against that possibility," Goldman Sachs said.

A double-dip recession is defined as at least one quarter of a contracting gross domestic product (GDP) following a full-fledged recession.

Goldman's call contributed to a strong rally in the U.S. Treasuries market where two-year note yields dived to record lows under 2.00 percent. Eurodollar futures also surged ahead as the market moved to tighten the odds on the Fed cutting rates before year-end.

Most other analysts say it would take a sustained run of weak data, another sharp drop in the stock market or a further tightening up in credit markets to trigger another rate cut after a hefty series of 11 cuts last year.

The policy-making arm of the central bank, the Federal Open Market Committee, meets next on Aug. 13.

Analysts expect it will stick with its habit of recent months of describing the risks to the economy as "balanced" -- despite the apparent weight of evidence to the contrary -- out of fear of spooking the markets.

"The risks aren't evenly balanced. It's an illusion," said Bill Quan, director of research at Mizuho Securities.

The Fed would not necessarily signal its intentions by shifting its statement to indicate a renewed risk of economic weakness.

"They don't want to show too much concern because they want to maintain confidence as much as possible," said Barclays Capital Markets chief U.S. economist Henry Willmore.

Willmore on Thursday revised his expectations for a rate increase in November, and now expects no change in rates until the second quarter of next year. Earlier this year, he was among the more bullish economists on Wall Street, calling for a series of tightenings before the end of 2003.

But much has changed in recent weeks, with mostly soft economic readings coming on top of recent stock market turbulence and tightening up of credit markets. Importantly, inflation remains low, meaning the Fed has room to maneuver.

This week came news that the downturn last year was both longer and deeper than previously thought, with three quarters of negative growth clearly marking out recession. And after a bright start to 2002, activity slowed to a sluggish 1.1 percent pace in the April-June period this year.

Though figures on Friday showed personal incomes have continued to rise and auto sales figures this week, spurred by cheap financing, were strong, economists worry that a weak jobs market and steep stock declines will take their toll on consumer spending.

On the investment side, companies are barely starting to show signs of willingness to spend, something policymakers have said is important to keep the recovery on track.

"The direction of the indicators is worrying, but we're not there yet in terms of justifying a cut," said HSBC Securities chief economist Ian Morris.

Some economists have started to revise down the GDP forecasts for the rest of the year.

According to those firms who deal directly with the Fed in the U.S. Treasuries market, the chance of another contraction -- a double-dip recession -- is up to 21 percent, up from 13 percent in a previous Reuters survey just over two weeks ago.

"The chances of a double dip have increased substantially," said Mizuho's Quan, citing the sluggish jobs market, signs that construction is topping out and weak capital spending in June.