Expectations are rising for the Federal Reserve to cut short-term interest rates again.
A bleak employment report for May and continued sluggishness in growth of the money supply are responsible for the latest change in sentiment. Before the reports late last week, the prevailing view was that the Fed would keep interest rates steady amid signs of healthy economic activity.
"I certainly think the market will be anticipating an ease," said Darwin Beck, an economist with First Boston Corp.
The next easing, which could come within a month, would probably entail a quarter-point lowering of the Fed's target for the federal funds rate, to 3.5 %. Some economists think the Fed may also lower the discount rate, now at 3.5 %.
Last Thursday, the Fed reported that the M2 measure of the money supply feel $10.7 billion in the week ended May 25, putting the aggregate's growth rate below the Fed's target range.
Unemployment at 7.5%
On Friday, the Labor Department reported an increase in the unemployment rate in May to 7.5% if the civilian labor force, the highest since August 1984. The rate was 7.2% in April.
The rise mainly reflected a large increase in the number of people looking for jobs, rather a big jump in the unemployed.
In addition, nonfarm jobs rose 68,000 last month. Economists had expected an increase of more than 100,000.
"This is not an increase consistent with strong economic recovery," said Mr. Beck.
But employment growth figures for March and April were revised upward, by a total of 75,000 jobs.
"The important point here is that the economy is still on a slow-growth track," said Mr. Beck.
Room Seen for Easing
The economy continues to show signs of a muted recovery that leaves room for an easing by the Fed, said Anthony Karydakis, senior financial economist at First National Bank of Chicago.
He added that "only signals of indisputable strength" would remove the possibility of an additional easing by the Fed.
Rising unemployment during a presidential election year adds greater uncertainty to the art of predicting future Fed actions, economists said.
The increase in the unemployment rate "could provide plenty of ammunition for George Bush's opponents," said Gary Ciminero, Fleet Financial Group's chief economist.
"The Fed may very well be snookered [into easing rates] by the 7.5% unemployment rate," said Mr. Ciminero.
Consumers May Suffer
He believes the economy already is on the path of a sufficient recovery, and that further decreases in short-term rates will have a greater dampening effect on consumers' interest income than a stimulative effect on their cost of borrowing.
Economists think a further easing would likely cause banks to cut their prime lending rates from the current 6.5%.
The last time the Fed eased, on April 9, Chemical Bank was the only major bank to lower its prime rate. Ironically, Chemical Bank raised its prime rate up to 6.5% on Friday.
"It's important to the Fed to extract a 50-basis-point cut in the prime with an ease," said Mr. Karydakis. A cut in the prime would increase consumer loan demand, he added.