Easing by Fed in December Is Considered Likely

NEW YORK - The Federal Reserve will likely cut interest rates again this year, but it will take a dramatic slump in November payrolls to get the Fed to move immediately, economists said.

"The Fed is balancing [its] position to aggressively address the recession against the reluctance to appear to be panicking," said Douglas Schindewolf, money market economist at Smith Barney Harris Upham & Co.

Expected Drop in Sales

Data on jobs, due to be reported on Friday, are expected to show payrolls falling by 31,000, after a 1,000 drop in October.

The economic outlook for the all-important Christmas shopping season remains bleak. The Conference Board said Christmas sales were expected to drop 3% from last year's level.

Nonetheless, many economists noted that the Fed has cut rates twice in rapid succession - once on Oct. 30 and again on Nov. 6. The Fed may want to give those cuts in rates a chance to tempt consumers back into a spending mood, economists said.

Steve Gallagher, money market economist at Kidder Peabody & Co., noted that the survey week for the November payroll data was only a week after the most recent rate cut - allowing virtually no reaction time.

Timing of a Rate Cut

"I think they will probably hold off on easing till the Federal Open Market Committee meeting on Dec. 17, when they'll have more reports on Christmas sales," he said.

Mr. Schindewolf said he also expected the Fed to move at the Open Market Committee meeting, but with a dramatic 50 basis-point cut in both the federal funds and discount rates, instead of the usual 25 basis-point move on funds.

"They don't want to be seen as responding to any one number, but when they do, they're going to respond aggressively," Mr. Schindewolf said.

Dana Sorrentino, a Fed watcher at Citicorp Securities Market Inc., said the Fed would ease on a mixture of weak payroll employment, wages, hours worked, and other ingredients. Ms. Sorrentino looks for a drop in payrolls of 25,000.

But if payrolls plummet by close to 100,000, the Fed could come in with a forceful show of support for the economy, she said.

"That could lead the Fed to do something more dramatic, like a 50 basis point cut in the discount rate and the funds on the same day [that the data is released]," Ms. Sorrentino said.

The Fed's weekly reserve data, released last Friday, showed that the M2 monetary indicator rose $5.2 billion, while analysts had expected it to remain close to flat.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.