Smaller rate cut from Fed expected
Fed Chairman Ben Bernanke and his colleagues are widely expected to cut their target for short-term interest rates, which influence borrowing costs economywide, when they meet Tuesday, according to a futures market in which investors bet on upcoming Fed actions. It would be the third cut in three meetings and would lower the target rate from 4.5 percent, the lowest since March 2006.
But while a quarter-percentage point cut has been priced in for weeks, odds for a heftier, half-percentage point cut have fluctuated widely, according to economic consulting firm Action Economics.
Expectations for a half-point move dwindled Friday after the government said U.S. employers added jobs at a healthy, but not robust, clip in November. The report suggested to many economists that there would still be backing for a rate cut to help boost the economy and ease tight credit conditions. But odds of getting support for a bigger move by what appears to be a fairly divided Fed will be difficult given the continued job gains.
After expecting a nearly 70 percent chance of a half-point cut early last week, investors were pricing in a 1-in-3 chance for the larger move Friday.
"It confirms the need for easing, but it doesn't on the face argue for a half-percentage point," Moody's Economy.com chief economist Mark Zandi says. Still, Joel Naroff of Naroff Economic Advisors says, "The debate should be fierce."
Companies added a seasonally adjusted 94,000 workers in November following an increase of 170,000 in October, the Labor Department said. Jobs were added in health care and social assistance fields, at hotels, restaurants and bars, in government and at retailers.
The number of construction workers fell for a fifth consecutive month and factories cut workers for the 17th straight month. Real estate and finance jobs also declined. The unemployment rate was 4.7 percent for a third consecutive month, up from the recent low of 4.4 percent in March.
Wages for nonsupervisory workers posted a rapid 0.5 percent gain to $17.63 an hour on average in November, the biggest gain since June. Wages were up 3.8 percent last month from a year earlier. Such wage gains will likely have some members on the Fed balking at a large cut due to worries about inflation heating up, says Stuart Hoffman, chief economist at PNC Financial Services.
Hoffman, along with other economists including Zandi and Mission Residential chief economist Richard Moody, expect the Fed will strike a compromise, cutting the federal funds rate by a quarter-percentage point while also cutting the discount rate, the rate the Fed charges banks for direct loans, by a larger amount. That would narrow or eliminate the spread between the two interest rates and could loosen conditions in credit markets.
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