WASHINGTON - The Federal Reserve's stunning decision last week to cut the discount rate to 3%, despite the euphoric reception in the bond market, raises troubling questions about the economy and how to manage money in the months ahead, analysts say.
The Fed's move, which was followed in open-market operations by a reduction in the federal funds rate to 3.25% from 3.75%, also raises fresh questions about the electability of President Bush. That in turn, analysts say, adds to the political uncertainty that has begun to nag stock and bond market participants in recent weeks.
"This is pretty much the worst-case scenario for Bush," said Nancy Kimelman, chief economist for Technical Data in Boston. "It's dismal economically, and it's dismal politically, and raises a lot of questions for the market."
When portfolio managers sit down in their offices today, said Ms. Kimelman, they face some tough choices. "First and foremost is, what do they do with their cash, which is paying virtually no interest." In the case of bonds, she added, managers will have to decide if they can bank on further capital gains from still lower rates.
The drop in the discount rate to 3% marked the lowest cost of short-term bank credit in nearly 29 years and came less than an hour after the Labor Department's report showing the June jobless rate rose to 7.8%. The increase from 7.5% in May marked the highest level of joblessness since March 1984.
Job losses were widespread, according to the department's household and nonfarm payroll surveys. Nonfarm payroll jobs tumbled by 117,000, with declines in all categories except government.
The report seems to clinch the view that the housing and manufacturing sectors of the economy have been losing steam. Manufacturing jobs fell by 58,000, with continuing declines in defense and electronic firms. And the construction industry, which normally gains jobs this time of year, lost 32,000 jobs.
The Labor Department figures showed increases in the unemployment rate in all of the 11 largest states except Pennsylvania. Many of these states are expected to be big battlegrounds in the fall presidential campaign. In California, joblessness jumped to 9.5%, and New York and New Jersey recorded rates of 9.2%.
"Bush is unquestionably in trouble," said Alan Jacobson, vice president for Country NatWest, USA. "The economy is not growing to the extent that people feel good about it."
President Bush and his aides tried to put the best face they could on the situation. Talking briefly with reporters on Capitol Hill, where he appeared to endorse a Republican health - care package, the President praised the Fed for cutting the discount rate and said it should help stimulate the economy.
Treasury Secretary Nicholas Brady said in a statement, "The fundamentals remain in place for steady growth and low inflation."
But congressional Democrats were quick to tear into the administration and insist the economy is in deep trouble. "The administration and others say that we have reached the end, we see the light at the end of the tunnel, and so forth," House Speaker Thomas Foley, D-Wash., told reporters. "Now all of a sudden we get something like this popping up and casting doubt."
"We have a job emergency in this country and it's just not right," said Sen. Donald W. Riegle Jr., D-Mich., chairman of the Senate Banking Committee.
"The Bush administration has no plan for America even though our unemployment rate is the highest it's been in eight years," he said in a statement. "This administration won't admit that there's a sickness in the American economy. That's why we need a new President."
According to the governments's official statistics, the economy grew slightly for five consecutive quarters beginning in the spring of last year. But the employment report, along with other more recent statistics, called to mind last year, when the economy slowed to a crawl in the second half.
"There's a very serious message here," said Ms. Kimelman. "Analysts have been making light of comparisons between 1991 and 1992. The latest batch of data suggests the situation this year is very similar to last year."
Still, not all analysts are ready to give up on the economy and the benefits that can flow from lower rates. Stephen Axilrod, managing director of Nikko Securities Co. International, said businesses will not have to earn as much to carry debt on their books for inventory and other expenses. And, he pointed out, lower rates help home owners who get adjustable-rate mortgages and home-equity loans.
Commercial banks promptly followed the Fed on the discount rate, cutting the prime lending rate to 6.0% from 6.5%. Separately, the Veterans Administration announced Thursday that it was cutting the rate on administration-backed loans from 8.5% to 8.0%.
Still, some analysts say, it will take time for corporations and individuals to respond to easier credit and to alter their spending and investment activities.
And, said Mr. Axilrod, "there's nothing at all the administration can do" to help the economy before the elections because the fiscal situation is deadlocked.
