Hopes for Easing By Fed Remain Following Data On Employment

WASHINGTON - Bond market hopes for another lowering of short-term interest rates by the Federal Reserve were kept alive Friday after the Labor Department issued a report showing job markets continued to stagnate in September.

The report, which President Bush called an encouraging sign that the U.S. economy is moving in the right direction, showed the civilian jobless rate down a notch, to 6.7% from 6.8% in August. In June, unemployment reached 7%, its highest point for the year so far.

But analysts said that although the report shows some pockets of strength in the labor market - notably in the service sector - it also portrays a sluggish recovery that could still prompt a move to lower the federal funds rate to 5% from 5.25%.

Market expectations of a more accommodative Fed have been bolstered by the ongoing softness in the money supply.

The Fed stayed out of the market on Friday, apparently content to wait until policymakers get more information on the economy and credit conditions. Still, some analysts said they think there is a good chance of a rate cut by Friday, when monthly government reports on retail sales and producer prices are due.

"We're beginning the fourth quarter on a very weak note, so I think all the signals are go for the Fed to ease again," said Mickey Levy, chief economist for CRT Government Securities. "We're still chopping sideways without momentum."

The M2 measure of money, which includes currency, checking accounts, and some savings accounts, is still stuck at the bottom of the Fed's target range of 2.5% to 6.5% in annual growth, according to last week's report from the central bank. The broader M3 measure of money is hardly growing at all.

"The fact of the matter is that those money numbers act as a sort of political lightening rod," said Thomas Carpenter, chief economist for ASB Capital Management, Inc. "The administration is applying the pressure to make sure the hardliners at the Fed see the numbers that get their pledge of allegiance."

"There's been no growth in M2 since June," said Darwin Beck, director of First Boston Corp. It was "no accident" that Federal Reserve Chairman Alan Greenspan was invited to attend the recent meeting of the cabinet-level Economic Policy Council to review the credit crunch, added Mr. Beck.

The minutes of the Aug. 20 meeting of the Federal Open Market Committee released on Friday showed members voted 10-to-0 for a neutral monetary policy, but one tilted in favor of lower rates. There was considerable discussion of the weak growth in money supply, which was seen by many members "as a disturbing development."

Still, not all analysts said another ease is near. Alan Lerner, managing director of Bankers Trust Co., noted that the Fed has already moved aggressively with its last rate cuts of Aug. 6 and Sept. 13, when the discount rate was lowered to 5%. Those actions will take time to work their way into the economy.

"I'm not sure its appropriate for the Fed to ease," said Mr. Lerner. Moreover, he said, because the sluggishness in money supply reflects the shift by investors into bond funds and other less liquid accounts, M2 is not a "clear proxy" for what is going on in the economy.

While the bond market and many economists saw the unemployment report as a sign that the economy is still too weak, President Bush viewed it as "one more sign that the economy is strengthening."

He pointed out that employment surged by 749,000 during September, according to Labor Department's household survey. That report supplements the more closely watched business survey, which showed a modest jobs increase of 24,000 during the month. Labor officials said the first survey's huge increase was largely a statistical aberration caused by the absence of the usual summer employment trend among teenagers.

President Bush stressed the country's low interest rates. "People should take note of the fact that interest rates have fallen to levels that we haven't seen since 1977," he said.

He also apparently endorsed the Fed's easier interest rate policies recently, saying he is "glad to see [lower rates] being accommodated here along with lower inflation." As always, he said, "we would like to see lower rates."

The President's upbeat assessment of the economy was aimed in part at bolstering his decision to veto the $6.4 billion bill to extend unemployment benefits that Congress approved on Tuesday as unnecessary and "bad" for the economy, because it would "bust the budget agreement."

Mr. Bush urged Congress to pass instead an economic stimulus package including a capital gains tax cut and expanded Individual Retirement Accounts, as well as a $1.9 billion alternative unemployment benefits bill that would uphold the budget pact by offsetting lost revenues with fees.

"I'm trying to help the economy as well as help those who are out of work," he said.

The President acknowledged that he should not be "unrealistic" about the meager rate of economic growth. He said there seems to be a "disconnect" between statistics - which show the economy recovering - and actuality.

"The economy needs a shot of confidence," he said. "Banks have money to lend, but they don't have the confidence to lend it" and businesses lack the confidence they need to make investment and job-creation plans.

But the President said there is not much he can do "unilaterally" to prod the economy forward, "except jawbone" bank regulators - as he did in a cabinet council meeting last week - to stop keeping a rein on credit growth.

The Labor Department's report that nonfarm payroll jobs increased by 24,000 in September was about in line with market expectations. Although the increase was not much, July and August payrolls were revised up substantially from earlier reports.

Some analysts said they were impressed by the upward revisions to the August and July figures, which should indicate greater strength in U.S. output in the third quarter. Much of the rise came in service-sector jobs, which account for nearly 80% of all employment, and advanced 76,000 for the fifth consecutive monthly gain.

But analysis also noted that the report showed manufacturing jobs fell 22,000, after showing strength in previous months.

The figures show that while labor markets are not getting any worse, they are not getting better, said Janet L. Norwood, commissioner of the Bureau of Labor Statistics. "The labor market clearly appears to have been in a holding pattern over the last several months," she told the congressional Joint Economic Committee.

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