Fed Forecast: One More Cut

By John S. McClenahen Late-December's and early-January's run of encouraging economic reports suggested that the Federal Open Market Committee might leave the influential federal funds rate at 1.75% when it meets at month's end. That's now unlikely. December's increase in the U.S. unemployment rate to 5.8%, from a revised 5.6% in November, coupled with the loss of 187,000 jobs in the economy's private sector put the odds on the side of one more 25-basis-point cut to 1.5%. "We still expect the Fed to ease one last time on Jan. 30," relates Bruce Steinberg, chief economist at Merrill Lynch & Co., New York. The U.S. unemployment rate has increased 1.9 percentage points since October 2000, notes Lois Orr, acting commissioner of the Bureau of Labor Statistics (BLS), the federal agency that analyzes jobless data. And Merrill Lynch's Steinberg believes the U.S. jobs rate is "probably" headed for 6.5%. "That will reduce wage growth, helping to restore profitability, though muting the consumer recovery. [It's] cold comfort to those losing jobs -- but necessary to restore margins and ultimately get the economy moving again," he contends. In 2001 the manufacturing sector of the U.S. economy lost 1.3 million jobs, about 7% of its workforce. Those numbers include 133,000 jobs lost in December alone -- mostly in electronic equipment (28,000), industrial machinery (24,000) and transportation equipment (18,000). During 2001, seven U.S. industries -- electrical equipment, leather, apparel, textiles, primary metals, industrial machinery and furniture -- each lost more than 10% of their total employment, the BLS says.

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