NEW YORK (CNN/Money) -
Federal Reserve policy makers aren't expected to cut interest rates when they meet Tuesday, but there's a good chance the central bank, after doing nothing with rates all year, could finally make a move in early November.
To support the economy during a recession that began in March 2001 and to help it rebound from the Sept. 11 terrorist attacks, the Fed slashed its target for short-term rates 11 times last year, lowering the cost of borrowing and encouraging spending and investment.
The Fed has been on hold so far this year. The economy has been growing, but never robustly enough to raise inflation fears, which could spur the Fed to raise rates, and never with enough signs of weakness to force another rate cut.
That could change this fall if business spending -- described by Fed Chairman Alan Greenspan and other economists as key to the recovery -- continues to be as sluggish as it has been all year.
"[By the fourth quarter], you will continue to have worries about corporate governance issues, a weak stock market and a buildup to war in Iraq leading to higher oil prices -- a lot of negative psychological forces in the economy that will make it very hard to sustain growth going forward," said Ethan Harris, a senior economist at Lehman Brothers, which expects a quarter-percentage-point Fed cut by November.
These factors, Harris said, will put "corporate America in a very conservative mode, cutting costs, trying to rebuild profits -- not in the mood to hire or expand their businesses."
An early sign of this could be the recent, alarming rise in weekly claims for unemployment benefits. Claims have been above 400,000, a level that indicates weakness in the labor market, for three straight weeks.
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"[J]obless claims above 400,000, along with [a] rising [number of people drawing] continuing benefits, suggests that the corporate community is shedding jobs," Merrill Lynch chief economist Bruce Steinberg said in a research note. "While corporate downsizing may boost labor productivity and profits, it raises the risk of a downturn in the economy."
Still, Steinberg is predicting the Fed will leave rates alone and even start raising them again by next March. In fact, only four major Wall Street firms expect a rate cut at the Fed's Nov. 6 policy meeting, and only six expect a cut by the end of the year.
But the implied yield on the federal funds futures contract -- a closely watched gauge of what traders are betting about the Fed's monetary policy -- indicates traders think there's a 78-percent chance the Fed will cut rates by its Nov. 6 policy meeting.
Former Fed Governor Lyle Gramley, now a consulting economist with Schwab Washington Research Group, said he thinks there's a 50-50 chance the Fed will be forced to cut rates again in the next few months.
"This is a very different recovery than any I've seen -- there's none of the dynamism or momentum we normally see," Gramley said.
And history would seem to support the idea of another Fed cut coming by November, according to Anthony Chan, chief economist at Banc One Investment Advisors.
Chan studied Fed policy actions during Greenspan's tenure, which began in 1987, and found there's an 82 percent chance of the central bank cutting rates within three months after it announces it sees the risks to the economy leaning towards weakness -- and the Fed made such a policy shift at its Aug. 13 meeting.
Despite this, Chan and a majority of economists doubt the Fed will cut rates again. "I still don't think they'll lower rates, but this tells me they're prepared to lower them at the first sign of trouble," Chan said.
Most economists think the Fed can afford to delay its decision on rates, at least until November, thanks to expected strong economic growth in the third quarter. Robust automobile sales and the home refinancing boom has been boosting consumer spending, which fuels about two-thirds of the nation's economy.
Rising business inventories and the shrinking gap between imports and exports will also raise growth. Many economists expect at least 3 percent growth in gross domestic product, the broadest measure of the nation's economy, compared with the second quarter's anemic 1.1-percent pace.
But none of those third-quarter positives answers the question of what will happen to business spending in the fourth quarter, which could be the key question for the Fed.
"Consumption is growing, government outlays are growing and the third quarter will look very strong," said Steven Wieting, an economist at Salomon Smith Barney, which expects a half-percentage-point Fed rate cut by November. "But going forward, business spending is flat and decisions are being deferred. That can keep us weak for the near term -- neither contracting nor expanding."
Waiting until November to act also gives the Fed a lot more data to work with, including unemployment reports for September and October.
"The economy is slowing heading into the fourth quarter, but none of us knows how much yet," said former Fed Governor Gramley. "There may be another zig-zag like we've been experiencing all year. If it is, then the Fed will sit still. If it appears to be a more extended period of weakness, then the Fed will act."
Of course, unless the Fed sees undeniable signs of weakness, it might not feel it can act, with its target for the fed funds rate at 1.75 percent, a 40-year low. It might want to hold some ammunition back for some exogenous shock, such as another terror attack.
And with rates already so low and credit for consumers and businesses already stretched thin, another Fed rate cut might not do much good, anyway.
"Even if the Fed got very concerned about these headwinds -- business investment, consumer confidence, stock market frailty -- they'd be asking themselves if cutting another 25 basis points [one-quarter percentage point] would do any good whatsoever," said former Fed economist Lara Rhame, now with Brown Brothers Harriman. "That I seriously question."
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