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Rate cut to follow jobs data
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May 4, 2001: 3:19 p.m. ET
Weak jobs report convinces economists Fed will cut rates by half point in May
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NEW YORK (CNNfn) - Friday's job report has leading economists more convinced than before that another half-percentage-point cut in interest rates will be made by the Federal Reserve at its next meeting May 15.
A survey of 16 economists finds all believe there will be at least a half-point cut, with two saying there's a chance of a cut as large as three-quarters of a percentage point. While 10 of the economists already expected a half-point cut before the jobs report, the other six of them had been thinking a quarter-point cut was the most likely scenario before Friday's job report.
And this month's meeting may not be the end of rate cutting, with many of the economists saying they see a chance for yet another half-point cut in the June meeting, a move that would bring the Fed funds rate down to 3.5 percent, which would be its lowest level in seven years.
The Fed has already cut rates by a half-percentage point four times since Jan. 3, which has undone a series of six smaller hikes by the central bank between June 1999 and May 2000 that raised rates a total of 1.75 percentage points.
Anthony Chan, chief economist for Banc One Investment Advisors, told CNNfn's Before Hours program that the jobs report virtually assures a half-point cut May 15, and makes another half-point cut at the June meeting far more likely.
"Certainly if the data continues to be this weak, the Federal Reserve will be monitoring this very, very carefully over the next couple of weeks," he said. (265KB WAV) (265KB AIFF)
The economists also are in agreement that the worst of employment statistics are not over, with many forecasting unemployment will rise to about 5 percent by the end of the year from April's 4.5 percent, announced Friday.
"Jobs cuts tend to lag the process," said David Jones, economist at Aubrey G. Lanston. "You've had an inventory correction (that) may be getting near the end, you still have to superimposed investment boom/bust cycle that has been taking place, and there's still a process squeeze."
Still, almost all of the economists believe the nation will be able to stay out of recession, although several suggest that the economy, as measured by the gross domestic product, may shrink in the current quarter. Even more of them acknowledge there is at least a risk of a recession. But most believe the Fed rate cuts will lead to economic growth in the third quarter and beyond.
"I thought the first six months of the year would be a white-knuckle ride," said Maureen Allyn, chief economist at Scudder Kemper. "But monetary policy is as effective as ever. That money takes time to get in there, but I think it will stabilize things. We shouldn't expect anything to happen until July at earliest, though, and we'll have a few more months of holding our breath here."
Some economists are more pessimistic, saying the much-weaker-than-expected employment picture bodes badly for consumer spending, which has been supporting the economic growth as businesses scaled back spending.
"With today's report, the odds of a negative quarter of GDP growth have increased substantially, and the chances of a full-fledged recession just went up -- perhaps approaching 50-50," said Bill Cheney, chief economist for John Hancock Financial Services. "Job losses cut directly into the spending of the newly unemployed, and indirectly tend to have a very real impact on the confidence of those who are still working. If demand falls, firms will lay off more employees, and the downward spiral could put us over the edge into a bona fide recession before the Fed's actions can take effect."
Cheney is one of the two economists surveyed who saw a chance of a three-quarter percentage point cut later this month, and the only one who suggested the Fed might actually act to cut rates before the next scheduled meeting. But even he thinks there is reason to hope a recession will be avoided.
"It's bad news but not the end of the world," he said. "The Fed's easing started four months ago, and will be helping to stimulate the economy very soon."
Most of the economists said they don't believe the Fed decision makers were shocked by Friday's job report, especially given earlier layoff announcements. Several said another intervening rate cut or a larger-than-expected cut could hurt, by suggesting that the Fed is panicking or that the economy is in far worse shape than it is.
"We're going to have plenty of weak economic reports over the coming months," said Mark Vitner, economist with First Union. "If they respond to every one, they'll get down to zero percent interest rates pretty damn quick." 
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