By Barbara Hagenbaugh
WASHINGTON, Nov 4 - U.S. Federal Reserve Chairman Alan Greenspan is widely expected to swing his interest rate ax for the 10th time this year on Tuesday as he tries to shore up an economy most analysts say has tipped into recession.
Many analysts say things are looking so grim that they expect an aggressive half-percentage point cut, the third such move since Sept. 11. But some say the Fed should opt for a quarter-point reduction since its previous nine cuts have yet to fully impact the economy.
In a poll taken on Friday, 15 of the 24 primary dealers of U.S. government securities surveyed predicted the Fed will cut rates by a half point on Tuesday. That would bring the fed funds rate, which influences borrowing costs across the economy, to 2.0 percent, its lowest level in four decades.
The other nine firms predicted Fed officials will opt for a smaller quarter-point rate cut. However, most economists said the Fed needs to take a bolder step. With inflation tame, consumers on edge due to threats of more attacks and anthrax scares, and gloomy data flooding in -- most notably the massive job losses recorded last month -- they can't afford not to, analysts argued.
"Things are terrible," said Paul Kasriel, chief economist at Northern Trust in Chicago. "I think they (Fed officials) feel that they can reverse field quickly if in fact they overdo it ... They feel that a lower interest rate environment is necessary to try to mend balance sheets right now."
The Fed's decision is expected at approximately 2:15 p.m. EDT (1915 GMT) on Tuesday.
AND THEN THERE WERE 10 The Fed has already cut rates nine times since early January to try to reignite the struggling economy. Interest rates have dropped a whopping 4.0 percentage points in 2001.
In addition to monetary stimulus, Congress earlier this year passed a tax cut which included a measure that sent rebate checks into taxpayers' mailboxes.
Another fiscal stimulus package worth tens of billions of dollars aimed at helping a recovery after the Sept. 11 attacks on America is being debated on Capitol Hill.
Some economists said the Fed will choose to cut only a quarter point in light of the fiscal and monetary stimulus, which is believed to impact the economy with considerable lags. They also noted Fed officials will want to hold off until more data come in and the state of the economy becomes clearer.
"It would make sense for them to have a more limited move in November," Jade Zelnik, chief economist at Greenwich Capital Markets in Greenwich, Connecticut, said. "I think they get a chance to act more aggressively again in December if they see that the downward momentum has not faded at all."
Some economists have also argued that with interest rates so low, the Fed will want to hold onto some of its ammunition in case another shock hits the economy. However, many economists rejected that notion.
"That's what Davy Crockett was telling his men at the Alamo: 'Listen guys, we're running a little low here, so when they attack, don't use it all because we might need it tomorrow'," Northern Trust's Kasriel said sarcastically. "Yeah, right, that makes a lot of sense."
JOB PICTURE DIMS
Expectations of a half-percentage point cut were bolstered on Friday after the Labor Department reported the U.S. economy shed 415,000 jobs in October, the biggest monthly decline in more than two decades. The unemployment rate shot up to 5.4 percent from 4.9 percent in September.
Other data released during the week were no less dismal.
The National Association of Purchasing Management said its closely watched gauge of factory activity plunged to 39.8 in October -- its lowest level since Feb. 1991 when the economy was last in a recession -- from 47.0 in September.
A number under 50 signals contracting factory activity. The NAPM index has been below 50 since August 2000, suggesting the factory sector has been in a recession for more than a year.
In another report, the government said consumer spending slid 1.8 percent in September, its biggest decline in more than 14 years. Other data released last week showed a decline in consumer confidence in October, the worst showing of U.S. gross domestic product in a decade in the third quarter and a drop-off in construction spending in September.
With this in mind, economists expect the Fed will cut rates again at its final meeting of the year on Dec. 11.
All but three of the primary dealer firms polled by said they expected the Fed will cut rates again in December. Twenty firms said they expected a quarter-point cut while one predicted a half-point move on Dec. 11.