Rate cut still likely in wake of job report.

Hopes for a new round of interest rate cuts remain alive.

The Federal Reserve stunned the financial markets Friday by not easing despite a report showing persistent weakness in U.S. employment.

But economists, who have grown, accustomed to Fed easings on the same day the government releases its monthly jobs report, are now looking to Tuesday, when the policymaking Federal Open Market Committee is to meet.

Recovery |in Trouble'

"The report was weak enough to guarantee a Fed ease within the next several days," said Anthony Karydakis, senior financial economist at First National Bank of Chicago. The recovery is in trouble.

A Fed easing would probably encourage more banks to cut their prime rates. No other bank Friday followed the preceding day's move by First Fidelity Bancorp., Lawrenceville, N.J., to reduce its prime by a half point, to 5.5%.

The stock market plunged Friday when the weak employment report failed to produce an easing. The Dow Jones industrial average fell 53.76 points, to 3,299.61.

Bank stock prices also fell, but not to the same degree. Bankers Trust New York Corp. was down 87.5 cents a share, to $62.875; BankAmerica Corp. $1, to 42.875; and Chemical Banking Corp. 75 cents, to $32.

The bond market, which had been expecting an easing all last week, also fell but recovered some of the losses late in the day on the prospect of a rate cut this week. Yields on government bonds, which move inversely to price, rose. In late trading Friday, the yield on three-month Treasury bills rose 4 basis points, to 2.67%, while the benchmark 30-year Treasury bond rose 2 basis points, to 7.33%.

Friday's employment report showed that the nation's nonfarm payrolls shrank by 57,000 jobs in September, with a net loss of 26,000 factory jobs and a shorter average factory work-week. The market had been expecting a drop in nonfarm payrolls of as much as 200,000 jobs.

"High-paying jobs in the goods-producing sector declined and are now almost at a 10-year low," said Christopher Low, economist at Hongkong and Shanghai Banking Corp.

The Fed is expected to cut its target for the federal funds rate by 25 basis points this week, to 2.75%, and its discount rate by 50 basis points, to 2.5%. That would be the lowest discount rate since 1958.

Industry observers do not expect loan growth to pick up quickly in the wake of a Fed cut of short-term rates.

"Loan demand is not a leading indicator; it is a lagging factor," said Dennis Shea of Morgan Stanley & Co. "I don't see any meaningful loan growth until the end of next year."

Philip Braverman, chief economist of DKB Securities, the U.S. securities arm of Japan's Dai-Ichi Kangyo Bank, said:

"The rule of thumb is that, as interest rates go down, people borrow more - all other things being equal. But all other things are not equal."

While new easing by the Fed would have a somewhat stimulative impact on the economy, harsh regulatory oversight of the banking industry is dampening banks' eagerness to provide the new credit needed to boost economic growth, he said.

Low consumer confidence and high levels of debt are other factors that would limit any increase in borrowing, said Mr. Karydakis of Chicago's First National.

Pros and Cons for Banks

A cut in short-term rates would be marginally positive for banks, said Judah Kraushaar of Merrill Lynch & Co. It would help keep short-term rates sharply lower than longer-term rates, a situation that has benefited banks, he said, but it would not erase investor doubts about bank stocks.

Investors grew nervous last summer about banks' ability to maintain net interest margins and improve credit quality.

An easing would raise fears that, if the Fed succeeds in boosting the economy, short-term rates would rise, squeezing net interest margins. And since the Fed only eases in response to economic weakness, credit-quality improvements may slow.How Markets Reacted U.S. financial markets showeddisappointment when Fed didnot ease credit on Friday*STOCKSDow Jones 3,200.61Industrial average -53.76 410.47S&P 500 Index 5.82BONDS3-month U.S 2.67%Treasury bill yield +4 basis points30-year U.S. 7.33%Treasury bond yield +2 basis pointsFOREIGN EXCHANGEDollar versus DM1.4150German mark -0.004Dollar versus yen 119.53 -0.12(*) Figures as of 4 p.m.Source: Combined wire services

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