WASHINGTON -- Bond market hopes that the Federal Reserve will have to abandon its neutral policy on interest rates and ease credit another notch got a big boost Friday after the Labor Department reported that the job market stagnated in July for the second month in a row.

Financial analysts said as a result of the report that there is an increasing likelihood that Fed officials soon will have to lower the federal funds rate another notch, to 5.5% from 5.75%. Some said they expect a move before the Aug. 20 meeting of the Federal Open Market Committee.

Fred monetary policy has been neutral since late April, and Chairman Alan Greenspan has resisted repeated appeals from the Bush administration and some members of Congress for lower rates. President Bush said again on Friday that he wants to see rates come down to make sure the economy does not falter.

The Labor Department report said the umeployment rate last month fell to 6.8% from 7.0% in June. But the improvement in the jobless rate steemed from a large decrease in the size of the labor force based on the department's household survey. A separate survey that economists like to use showed nonfarm payroll jobs shrank by 51,000, following a revised decrease of 21,000 in June.

"In general, the labor market has shown no clear trend over the past few months," the department said.

President Bush said he was "delighted" to see the decline in the jobless rate and insisted that the economy is "moving forward." The President also said he did not wish to make "a clarion call" for Fed officials to lower rates.

But Mr. Bush continued, saying, "Basically, I think we can afford to have lower rates in order to keep the economy growing."

Private analysts said the bond market is primed for another move by the Fed to ease credit -- a situation that is in contrast to earlier this year, when fears of economic recovery constrained policymakers.

"It appears as if another cut in the funds rate is looming as a good possibility," said Irwin Kellner, chief accountant for Manufacturers Hanover Trust Corp.

Within half an hour after the release of the jobless report, the bond market soared, and the yield on the Treasury long bond tumbled to 8.25%.

The bond market, Mr. Kellner said, "had a field day" on the unemployment report and concluded that "evidence of any renewal of inflation is way down the road,"

"There's no great danger in easing because there's no inflation danger," said Robert Dederick, chief economist for Nothern Trust Co. in Chicago. "The market is expecting it."

Other analysts said the slow growth in the money supply, which Bush administration officials have also complained of in public, and the repeated calls for lower rates were all putting a lot of "political pressures" on the Fed.

"Mounting economic, financial market, and political pressures on the nation's central bank may not afford it the luxury of delaying another easing move until the next scheduled FOMC meeting," said Thomas Carpenter, chief economist for ASB Capital Management Inc.

The M2 and M3 measures of money both actually fell in July, according to last week's figures from the Fed. Normally, the money supply picks up as the economy improves.

Most private economists said they still believe a recovery is unfolding, at least a slow one. "We're seeing the seeds of recovery, albeit at a very slow pace," said Frank M. Robbins 3d, senior vice president the investment advisory firm of Patten & Patten Inc., in Chattanooga, Tenn.

Still, some analysts said they were less sure that recovery is assured. "I don't think we're stalling, but we have to worry that we are," Mr. Dederick said. "You have a Mexican standoff. The consumer sector is trying to pull things up, and the business sector is still pulling things down, and you can't get anywhere."

Bond market reaction to the unemployment report was overblown, said Lyle Gramley, chief economist for the Mortgage Bankers Association. "Nothing happened, and this is not going to give rise to panic at the Fed," said Mr. Gramley, who is sticking to his forecast for a moderate recovery to unforld through the end of next year.

But a few analysts said they maintained the view that the economy is not coming out of the woods.

"I've been saying rebound, yes, recovery, no," said Robert Brusca, chief economist for Nikko Securities Co. International.

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