The Federal Reserve appears poised to cut the fed funds rate by another quarter point, but such a move would probably not do much to stimulate borrowing.
The cut, to 5%, could come as early as today, after the release of September's employment figures.
If the economy is in fact pulling out of recession, as many as 200,000 unemployed workers should have found jobs last month. But many economists this week were projecting that fewer than 50,000 people actually did.
If they're right, it would be strong evidence that the much vaunted recovery is barely crawling. And that would put pressure on the Fed to ease rates in the hope that lending would increase, stimulating the economy.
What's more, the central bank might also cut its discount rate, said Donald Mullineaux, a former director of research at the Fed. That would be a more dramatic sign of its determination to rejuvenate the economy.
'A Long Way to Go'
But a quarter-point rate cut-or even a half-point reduction - won't be enough, many experts say. Why? Consumers and manufacturers are so mired in debt that cuts would have to be deeper, perhaps as much as a full percentage point, before they could be enticed to borrow heavily, economists say.
"We have a long way to go before we get much response out of the economy," said Stephen Slifer, chief financial market economist with Shearson Lehman Brothers Inc.
A percentage-point cut would put fed funds below the rate of inflation. When the Fed has done that in the past, the resulting low cost of funds has helped fuel recovery.
Fear of Overstimulating
But the Fed fears such a large cut would increase the money supply too quickly, spurring inflation. The Fed has managed to cut the funds rate almost in half over the past two years without triggering a spike in prices, but it remains wary of overstimulating the economy.
A quarter-point cut, however, seems like a safe move. "The economy is weak, the money supply isn't growing, and inflation is looking good," said Mr. Slifer. "They tell the Fed the same story - cut rates."
Manufacturers, which are showing signs of recovery, may be tempted to borrow if the Fed eases. "Lower rates should gradually increase a demand for credit," said Robert Giordano, director of economic research at Goldman, Sachs & Co.
But, because of their debt levels, an upsurge would not come overnight. Economists expect manufacturers to begin borrowing early next year, when capital is needed to replenish inventories.
The service sector of the economy, which fueled the go-go 1980s, mayn not be induced to borrow, even at lower rates. Even if it did, the borrowing would not be sizable enough to help stimulate the recovery.
Consumers may not return as quickly to the borrowing window as manufacturers. Consumers are awash in debt, and debt growth was only 3.5% in the second quarter, the slowest rate yet. Newspapers are full of layoff announcements, and the help-wanted sections are the thinnest in years.
Long-Term Rates Could Rise
"The fact that the consumers are not coming back on stream as rapidly as economists predicted is a major concern to the Fed right now," said Mr. Mullineaux, DuPont Professor of Banking at the University of Kentucky.
In fact, a move to ease short-term rates could actually further discourage consumers from borrowing, some think. That's because the market, worried about inflation down the road, might react by pushing up long-term rates, making mortgages more expensive, said Phillip E. Peters, chief investment officer at Boatmen's Bancshares Inc. in St. Louis.
The Fed has little control over long-term rates, which haven't fallen in lockstep with short-term rates.
Even if borrowers don't return to the market, the possible rate cuts do benefit banks. With a lower cost of funds, their margins increase. Banks are investing their excess cash in Treasuries and mortgage-backed securities, which have a better return than many commercial loans.
While Mr. Slifer thinks the Fed will cut the funds rate today, he said it may choose to wait another week to avoid the appearance of panic or a untoward reaction to political pressure from the Bush administration, which is pushing the Fed to aid the recovery.