Bad News Raises Pressure for More Easing
NEW YORK - The recent spate of weak economic indicators and financial markets' adverse reaction to mere suggestions of a federal fiscal stimulus leave the Federal Reserve with little choice but to ease monetary policy again, economists said.
The Fed's real concern, said Chemical Bank economist Henry Engler, is to prevent the type of decline next year that would cause much greater job loss and income loss. If evidence continues to point toward economic weakness, then the Fed will ease further, he said.
There is little argument among economists and administration officials that the recovery is lagging. Last Wednesday, President Bush called the economy's performance "unacceptably sluggish."
Jobless Claims Rise Again
Jobless claims for the week ended Nov. 2 rose by 39,000, to 493,000, the highest level since April 20, when the economy was still in recession. The rise in claims, economists said, points to a likely decline in November in nonfarm payroll jobs.
The nonfarm payroll data, together with the national unemployment rate, will be reported Dec. 6.
Some economists said they believe the monthly jobs data will catalyze another quarterpoint cut in the Fed's target for federal funds, which is now seen at 4.75%.
Such a move might come before the Dec. 17 meeting of the Federal Open Market Committee, which sets near-term Federal Reserve monetary policy.
A Quarter-Point Cut?
"I think they will ease 25 basis points - before" the committee meets, said Alan Lerner, an economist and managing director at Bankers Trust Co.
Mr. Lerner said the Fed might also consider a cut in the discount rate, now at 4.5%, but only after committee members are able to judge whether the economy is picking up during the Christmas shopping period.
Congress and the administration have thus far produced no workable plan for fiscal stimulus of the economy. A proposal advanced the week before last to cap credit card interest rates shocked the financial markets because it could hurt banks' profits and make them more reluctant to lend.
Also, economists were worried by a televised report that Secretary of Labor Lynn Martin had recommended tax breaks for Americans buying cars.
"I think most economists cringe at the idea of tinkering with relative prices," said David Resler, chief economist at Nomura Securities International Inc. "In a way, that would be rewarding the auto industry for raising prices."
"The idea of fiscal policy changes have killed the market" for Treasury securities, said Joseph Plocek, economist at MCM Inc. "The fear is, they will be voted in late and will be long-lasting."
The bond market worries that any fiscal stimulus package, especially one combined with easier money, would only invite a resurgence of inflation.
Meanwhile, the Fed's own data last week contained a glimmer of hope in the form of an increase in the money supply.
Susan Hering, economist at Salomon Brothers Inc., pointed out that the M2 money aggregate is now growing at a rate of 2.5% annually, the bottom of the Fed's current target range of 2.5% to 6.5%. Money growth had been below target.