/www.bloomberg.com/ By Craig Torres
Washington, Nov. 5 (Bloomberg) -- Falling U.S. consumer confidence, a drop in industrial production and rising unemployment have analysts and investors betting Federal Reserve officials will lower interest rates Wednesday.
At their Sept. 24 meeting Fed officials voted to hold the overnight bank lending rate, the nation's benchmark, at a 41-year low of 1.75 percent. The decision wasn't unanimous -- two members dissented -- and Fed Chairman Alan Greenspan may now be ready to join the rate-cut camp.
``The data that have come in since Sept. 24 have strengthened the hand of the rate-cutters,'' said Alan Blinder, a former Fed vice chairman who's now a Princeton University economist. ``The key question is whether they've got Greenspan on their side. My guess is that they have, that he's now persuaded to do it.''
Just two weeks ago many Fed officials were describing monetary policy as ``accommodative,'' meaning that rates were low enough to help the economy grow at a faster pace. Since then, a series of poor economic reports have suggested the recovery may have stalled.
On Oct. 26, citing private interviews, Washington Post reporter John Berry wrote that Fed policy makers probably would lower their target for the overnight rate. Investors took that as a signal from Greenspan, and began pricing in a rate reduction.
Fed Fund Futures
The implied yield on the November federal funds futures contract has fallen to 1.53 percent from 1.66 percent the day before Berry's article, indicating that investors forecast a 100 percent chance of a cut.
A series of weak economic reports followed publication of the article. Orders for durable goods fell 4.9 percent in September, the largest drop in almost a year. Consumer confidence dropped to a 9-year low. The Institute for Supply Management's factory index pointed to a second straight month of contraction in October. And auto sales were 27 percent lower last month than a year earlier.
On Friday, the Labor Department reported the economy lost 5,000 jobs in October and the unemployment rate rose to 5.7 percent. That persuaded many economists that the central bank would act.
A Bloomberg survey of 133 economists shows that 71 expect the Fed to cut the overnight rate by a quarter percentage point to 1.50 percent, the lowest since July 1961. Seventeen expect a half percentage point cut to 1.25 percent and 45 expect rates to remain unchanged.
Recovery Stopped
``Something has happened that stopped the recovery,'' said Gerald Cohen, senior economist at Merrill Lynch & Co. ``We're off to a very slow start in the fourth quarter.''
The U.S. is also being hurt by slower-than-expected growth overseas. Futures trading suggests the European Central Bank and the Bank of England will also lower their benchmark rates before the end of the year. Both hold their next meeting on Thursday.
Investors, companies, and consumers expect the economy will get worse before it gets better, Cohen said. The combination of a possible Iraq war, terrorism, and concerns about corporate governance are ``a wedge being driven between'' the U.S. economy and spending.
Take 3M Co., the St. Paul, Minnesota, company that makes products ranging from adhesives to Scotch-Brite kitchen cleaning pads. Profits are up at 3M. The outlook is not.
``I don't see an environment that is going to be pushing capital spending,'' said 3M chief financial officer Patrick Campbell at a conference last week. ``Businesses are far more cautious with their outlooks specifically because of terrorism and a number of other factors.''
3M
3M's net income rose 38 percent to $545 million in the third quarter. Even so, capital spending was cut to an estimated $800 million this year from $980 million last year and $1.1 billion in 2000.
``Our capital spending is down significantly,'' said Campbell. ``It's a highly uncertain world out there, with a lot of wild card elements. There's no clear signal of a rosy picture at all.''
Much of the discussion Wednesday around the Fed's 27-foot mahogany and black granite conference table is likely to center on whether lower interest rates can change that sense of insecurity and risk among consumers and businesses. Most analysts said a rate cut alone won't lead people or companies to spend more.
``My own view is that the slowness of the economy and particularly capital expenditures has everything to do with uncertainty about the world and almost nothing to do with interest rates,'' said Alice Rivlin, a former Fed vice chairman who is now a Brookings Institution economist.
The part of the economy most sensitive to interest rates, housing, is doing well already. New home sales rose 0.4 percent to a record annual rate of 1.02 million in September.
Bright Spots
``Parts of the economy continue to demonstrate'' growth, said Lawrence Goodman, managing director at the consulting firm Globalecon LLC. Fed policy makers might think they have done enough, he said, after cutting the overnight rate 11 times last year, particularly with tax cuts and additional government spending also helping stimulate growth.
Some Fed officials are still arguing rates may be low enough. Michael Moskow, president of the Chicago Federal Reserve Bank and a non-voting member of the FOMC this year, said last week that the current level of interest rates should boost demand ``throughout the economy.''
Still, most analysts said the Fed, having raised investor expectations, can't afford to leave rates unchanged.
``Greenspan's preference would have been to hold rates steady and let the economy pull out of this,'' said Nancy Roman, managing director at the G7 Group Inc., a Washington consulting firm. ``But with the data breaking against him, he is going to have to make a decision'' about whether to lower the overnight rate a quarter point or a half point, she said.