Fed expected to cut rates again

WASHINGTON -- The economic landscape has turned much darker -- consumer confidence is plunging, overall output is contracting and the number of Americans losing their jobs is at a 21-year high.

A 10th interest rate cut this year by the Federal Reserve is widely expected today. But the flood of bad economic data has raised fears the central bank's efforts to jump-start the economy could be overwhelmed, worsening a recession many analysts believe has already begun.

Adding to the economic uncertainty is the threat of more terrorist attacks and rising worries about anthrax contamination in the mail.

"The economy could really spiral downward if terrorism gets worse," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "That is a scary prospect because we have never faced anything quite like this before."

In normal times, the Fed's powerful medicine of lower interest rates would lift the economy out of a recession by boosting demand in interest-sensitive sectors such as housing, autos and big-ticket capital goods.

But all the central bank's credit easing could be undermined by the current climate.

The economic fallout from Sept. 11 was dramatically underscored Friday when the government reported that the unemployment rate jumped to 5.4 percent in October. In the biggest one-month job decline in 21 years, 415,000 Americans lost their jobs.

The government also reported last week that the economy -- which had been growing weakly for more than a year -- actually shrank at a 0.4 percent annual rate, as measured by the gross domestic product, in the July-September quarter.

Based on the size of the October job loss, analysts now are looking for the current quarter to show an even larger contraction.

"People don't know what is going to happen next," said Michael Evans of American Economics Group, who predicted the GDP would drop at a rate of 4 percent in the current quarter. The traditional definition of a recession is two consecutive quarters of declining GDP.

Adding to the picture of weakness, the National Association of Purchasing Management said Monday its index of activity in the service sector, where most Americans work, fell in October by the biggest amount since the index was created in 1997.

The Consumer Federation of America and the Credit Union National Association, a trade group for credit unions, also reported Monday that 28 percent of Americans now say they will spend less on gifts this holiday shopping season, up from 24 percent who expected to make cutbacks last year.

The Fed has cut rates nine times so far this year, including two half-point cuts since Sept. 11. Many economists are expecting the central bank will deliver another half-point rate cut today.

That would push the federal funds rate, the interest that banks charge on overnight loans, from 2.5 percent, which is already the lowest since May 1962, down to 2 percent.

"The markets are expecting a half-point cut and the last thing the Fed wants to do right now is disappoint the markets, given all the data showing the economy tipping into a recession," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

Inflation danger low

Lynn Reaser, chief economist at Banc of America Capital Management Inc. in St. Louis, said the Fed had room to make the larger rate cut because the weak economy has removed inflation as a threat.

"The near-term danger from inflation is very low while the danger from a negative spiral is very substantial," she said.

Even though the Fed does not have a lot to show for its 10-month credit easing campaign so far, most analysts believe the economy will rebound. However, they now believe the upturn may not arrive until the second half of the year, a significant change from the previous view that the GDP would start growing again in 2002's first quarter.

The expectation of a rebound, even if delayed, is based on the view that the Fed's sizable rate cuts will combine with President Bush's earlier tax-cut package and as much as $100 billion in new economic stimulus being contemplated by Congress.

"The Fed has done a huge amount of heavy lifting. Now it is a matter of waiting for that to show up in economic muscle," said Tim O'Neill, chief economist of Harris Bank in Chicago.