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Fed will cut rates twice by year's end (2007)

Fed will cut rates twice by year's end

Source: Reuters

Economists expect the Federal Reserve to cut interest rates twice this year, according to a Bloomberg News survey of economists. Pressured by the unexpected drop in employment, survey respondents said the Fed would cut interest rates a quarter point to 5% at its Sept. 18 meeting and make an additional cut to 4.75% in the fourth quarter. "A strong job market had been the foundation for a lot of what's been going well in the economy and for why a lot of us thought the economy could ride out the storm," said Carl Tannenbaum, chief economist at LaSalle Bank

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Bernanke Will Cut Rates Twice as Growth Slackens, Survey Shows

By Joe Richter and Kristy Scheuble

 Sept. 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, chastened by the first drop in employment in four years, will be forced to cut interest rates at least twice this year, according to a survey of economists.

The unexpected weakness in the labor market, which has helped the expansion survive the housing slump, will compel officials to put aside concerns about inflation. The Fed will lower its benchmark rate by a quarter point to 5 percent next week, and then reduce it to 4.75 percent in the fourth quarter, according to the median forecast of 66 analysts in Bloomberg News's monthly survey.

``In order to get out in front of the real risk of recession, I think the Fed has to cut,'' said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. ``A strong job market had been the foundation for a lot of what's been going well in the economy and for why a lot of us thought the economy could ride out the storm''

The clamor for looser monetary policy spread beyond Wall Street to Capitol Hill after the Labor Department's report on Sept. 7, which showed employers axed 4,000 jobs in August. Representative Barney Frank, chairman of the House Financial Services Committee, called for a ``meaningful'' rate cut. Until then, the Massachusetts Democrat's criticism had been limited to bank regulation.

``We need the interest rates to be lower to spur the economy,'' Richard Trumka, the treasurer of the AFL-CIO, the biggest U.S. labor group, said in an interview in Washington.

Barclays Changes Call

Barclays Capital Inc. economists abandoned their prediction that the central bank would hold rates until June. The firm now sees cuts at the next three meetings, and halved its growth forecast for the fourth quarter to 1.5 percent.

Growth will slow to an annual pace of 2.2 percent in the fourth quarter, 0.4 percentage point less than predicted last month, according to the median in the survey. The poll was conducted between Aug. 30 and Sept. 7, and more than two thirds of the responses came after the Labor Department report.

The expansion was already projected to slow from the second quarter's 4 percent annual pace. The sudden increase in credit costs for companies and people that followed the collapse in the subprime mortgage market pushed consumer confidence to a two- year low in August. Spending accounts for about two thirds of gross domestic product.

Plosser Skeptical

One Fed official expressed skepticism about the need for lower rates, even after the contraction in payrolls. Charles Plosser, president of the Philadelphia Fed Bank, said he's yet to decide. ``We want to be careful not to overweight one piece of information,'' he said in an interview on Sept. 8 in Waikoloa, Hawaii. He doesn't vote on monetary policy this year.

Alice Rivlin, a former Fed vice chair and now a senior fellow at the Brookings Institution in Washington, said the economy is slowing, ``but not any kind of a disaster.''

``Everybody on Wall Street wants a rate cut, but everybody on Wall Street always wants a rate cut,'' she said in an interview. ``I don't think the Fed will necessarily pay attention to that.''

Consumer spending, which accounts for more than two-thirds of the economy, will probably grow at a 2.3 percent pace in the final three months of the year, 0.4 percentage point less than forecast last month. It will grow at an annual rate of 2.2 percent this quarter, the survey showed. Spending gains averaged 3.7 percent per quarter the past decade.

Foreclosures

The worsening real-estate slump has pushed home prices down, forcing foreclosures and preventing owners from tapping equity for extra cash. The number of Americans who may lose their homes because they couldn't make payments reached a record in the second quarter, the Mortgage Bankers Association said Sept. 6.

Economists said the labor market will slacken further. The unemployment rate will rise to 4.8 percent by year-end, a 10th of a percentage point higher than forecast last month. It will reach 4.9 percent by mid-2008, compared with a prior forecast of 4.7 percent.

``It takes a while for the kind of turmoil we've seen to filter through the economy,'' said Brian Fabbri, chief economist at BNP Paribas SA in New York, who cut his fourth-quarter growth forecast by more than a percentage point to 1.3 percent. ``We're going to see a significant weakening.''

Economists' inflation forecasts were little changed even as gasoline prices have dropped and growth weakens.

Americans will pay 3.3 percent more for goods and services this year, compared with the 3.4 percent increase forecast in August, the survey showed.

So far, consumer spending is holding up. Figures last week showed U.S. service industries expanded at a faster pace than forecast in August. Economists also project a report later this week will show sales at retailers improved last month.

The loss of jobs suggests those gains won't be sustained, economists said.

``A lot of the data we've seen so far may be the lull before the storm,'' said Lena Komileva, an economist at Tullet Prebon in London.

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