Fed expected to cut rates for the first time this year

Martin Crutsinger

Monday, Nov. 4, 2002 | 9:36 a.m.

WASHINGTON -- The Federal Reserve is likely to move four-decades-low interest rates even lower this week in the face of rising worry that the struggling economy is headed for rougher times.

A series of recent economic reports has offered indications that the country's sputtering recovery is once again threatening to stall, and that leads many private economists to predict a rate cut when Fed policy-makers meet Wednesday.

"The jury is now in, and the verdict is rate cut," said Sherry Cooper, an economist at BMO Financial Group.

Most economists believe the only question mark is whether the Fed will cut its target for the federal funds rate, the interest that banks charge each other, by one-quarter or one-half of a percentage point.

The funds rate has rested at 1.75 percent since Dec. 11. That's when the central bank made its 11th rate cut in an aggressive yearlong campaign to bolster economic activity and restore growth. The Fed acted while the country was in the grips of its first recession in a decade and still suffering economic shocks from the Sept. 11, 2001, terrorist attacks.

The Fed was content to leave the funds rate at its lowest level in four decades for an extended period in the belief the low rates would work their normal magic and restore stronger growth.

Such low rates have allowed automakers to offer zero-interest financing deals that drew buyers into auto dealerships in record numbers through the summer. They also have produced the lowest mortgage rates since the mid-1960s, spurring sales of new and existing homes to record levels.

The strength in these two critical areas, however, has been insufficient to launch a sustained economic recovery. Jolts such as the corporate accounting scandals, rising oil prices and worries about possible war with Iraq have acted as strong headwinds.

The economy did rebound from lackluster growth at a 1.3 percent rate in the spring to 3.1 percent in the summer. But many forecasters believe growth will slump again in the current quarter.

The most pessimistic look for an anemic rate of 1 percent or less as the surge in consumer spending fades, especially for big-ticket items such as cars.

"We are clearly hitting a soft spot with consumers worried about everything in the world from a war in Iraq to another terrorist attack," said David Wyss, chief economist at Standard & Poor's in New York.

The government reported Friday that the jobless rate climbed to 5.7 percent in October.

The Commerce Department reported today the nation's wobbly manufacturing sector saw orders to factories drop by 2.3 percent in September, the second straight monthly decline.

Although the 2.3 percent drop in factor orders reported by the Commerce Department on Monday marked a better performance than the 3 percent decline analysts were predicting, more forward-looking data suggest a more somber outlook.