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To: Poet who wrote (7979)	12/3/2000 10:24:47 AM
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Sunday December 3 10:02 AM ET Experts: Slowdown May Lead to Cuts By Glenn Somerville WASHINGTON (Reuters) - The U.S. economy is losing steam so rapidly that the Federal Reserve almost certainly will be forced to stoke it next year by cutting interest rates to ward off rising risks of a recession, analysts say. ``The Fed has only one way to go now, toward an easing stance,'' said economist Allen Sinai of Decision Economics Inc. in New York. ``The only question is how fast will they do it in the face of what appears to be a rapidly developing slowdown.'' Evidence is piling up that some zest has left the spending that has driven the record expansion -- new-car sales are softer, consumer confidence is faltering and businesses are spending less on new computers and software associated with rising productivity or output. The United States has not endured a recession, in which economic output shrinks for six months or more, since the nine months from June 1990 through March 1991, when the current expansion, now in its 10th year, began. Fed Role Gets Harder No one is predicting a recession is in the wings at this stage, simply that the odds of one are up from a few months ago and that the U.S. central bank's task in averting it while keeping prices stable has grown more complicated. ``The weak tone of the latest data puts Fed officials between a rock and a hard place,'' Goldman Sachs and Co., the New York investment bank, said in its weekly economic analysis on Friday. The U.S. central bank has been aiming to slow growth to a rate that takes some pressure off drum-tight labor markets but has no wish to send the economy into a downward spiral. Growth measured by gross domestic product -- the sum of all goods and services produced within U.S. borders -- decelerated abruptly to a 2.4 percent annual rate in the July-September third quarter from 5.6 percent in the second quarter. ``The economy is making a transition from boom-like conditions to more middling conditions. That makes it a period of significant uncertainty and of significant angst as well,'' said economist Mark Zandi of Economy.com in West Chester, Pennsylvania. ``The risks (of recession) are rising but they're still low,'' Zandi said, ``Consumers are pulling back more than we thought and businesses are really reining in their investment spending, so for those reasons alone the risks are rising.'' Analysts say the Fed will be pushed to counter the risks, but will do it in a characteristically methodical way. The U.S. central bank raised interest rates six times from mid-1999 through May this year but has kept them steady at four meetings since then. It has maintained the risks were weighted more toward a flare-up of inflation than a steep slowdown, leaving its options open for more rate increases. No Rate Cuts Until 2001 Analysts think that policy stance will shift when the Fed's rate-setting Federal Open Market Committee meets on Dec. 19 for its final meeting of 2000, although rates likely will remain steady. Any rate cuts likely will not come until the first quarter next year. ``The Fed will be sticky about actually moving rates, though it is quite clear that it will (eventually) have to cut rates,'' Sinai said. ``The first step will be a move to neutral policy then, at least by March, an ease and the question then will be how often and how much.'' If the Fed does decide the time is right to move to a ''neutral'' stance, the signal would come at the conclusion of its policy-setting meeting in two weeks' time with a statement saying it feels the risks are evenly balanced between weaker growth and higher inflation. Among reasons for moving slowly is that a scarcity of employees to hire has the Fed edgy about potential sharp wage increases, while energy prices also have climbed, although with scant evidence they have spread through the economy in the form of measurable increases in inflation gauges. Sinai said he expected the government report on November employment, scheduled to be issued next Friday, would show weaker job growth. ``Oil is tougher, but if we get through the winter with no spillover of price rises into core inflation rates, the Fed can move to lower rates,'' he said. Economist Lynn Reaser of Banc of America Capital Management Inc. in St Louis agreed the stage was being set for a gradual move toward at least one rate reduction in the first quarter next year. ``The economy clearly is at greater risk of a hard landing now than it was just three weeks ago, but we do not appear to be headed for a recession that would bring a whole string of reductions,'' she said. ``They (the FOMC) could very well move to a neutral position this month, and then cut by 25 basis points (one quarter of a percentage point) in the first quarter,'' Reaser said. Email this story - View most popular \| Printer-friendly format Earlier Stories Fed Speakers Say Inflation Still a Risk (November 28) Fed Official: Inflation Still Key Risk (November 28) Fed Official Wary of Money Supply Growth (November 28)