--- by CHRISTOPHER ANSTEY ---
WASHINGTON (AFX) - The surprisingly weak rise in fourth-quarter employment costs gives the U.S. Federal Reserve room to cut interest rates aggressively at next week's policy meeting, analysts said.
The fourth quarter Employment Cost Index "could have really put an inflation barrier up for the Fed.....a good number like this means the Fed need not be overly concerned," said Peter Kretzmer, senior economist at Banc of America Securities.
The Labor Department earlier reported that the ECI -- a broad measure of wage and benefit costs -- rose 0.8 pct in the fourth quarter, down from a 0.9 pct rate in the third quarter, against expectations of a 1.1 pct rise.
On a year-on-year basis, the index rose 4.1 pct, down from a 4.3 pct rise in the previous quarter.
"This certainly strengthens the case for a 50 basis point cut," said Mike Moran, chief economist at Daiwa Securities America.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note that the indicators embedded in the report are "on the face of it, good news, and they help the case for a 50 basis point ease."
Moran said the small rise in the ECI was "remarkably restrained (and) among the best in recent years."
David Orr, chief economist at First Union Corp, said the 3.0 pct annual rate increase in private sector wages and salaries "should be music to the ears of Fed governors worried that a tight labor market would push up wage pressures," in a research note.
Economists cautioned that it is not certain that the Fed will cut the key federal funds rate, currently at 6.0 pct, by a half percentage point at the Jan 30-31 FOMC meeting, and could opt for a quarter point reduction.
"I don't think this is necessarily the decisive number. It really could go either way," Kretzmer said.
Moran would not forecast what the Fed will do on interest rates. The ECI's smaller-than-expected rise was helped by weakness in manufacturing and the finance, insurance, and real estate sectors, which showed relatively small increases in both wage and benefit costs.
"The labor market is softer, with manufacturing being hit the hardest," Moran said.
However, analysts said the ECI report may have seasonal adjustment problems, which cloud the true picture of labor costs.
"The fact that both (wage and benefit) components of the ECI rose by much less than expected points at least to the possibility of seasonal adjustment problems," Shepherdson said.
Benefits rose 0.8 pct in the fourth quarter, down from the 1.0 pct increase in the third quarter. Wages and salaries, which account for 70 pct of compensation, rose 0.7 pct in the fourth quarter, down slightly from a 0.8 pct gain in the third quarter.
Kretzmer said one factor behind the weakness in the report could be benefit costs being shifted into the first quarter from the fourth, along with a change in bonus distributions.
Noting that the first-quarter 2000 ECI jumped by 1.4 pct, Kretzmer said there could be a similar acceleration in costs during the current quarter.
"This is a notoriously difficult series to interpret," he said. Fed chairman Alan Greenspan may give some indication of what the Fed will do when he appears at a Congressional hearing on fiscal conditions at 10.00 am.