With the economy looking less healthy than before, Wall Street is beginning to expect that the Federal Reserve Board will cut interest rates again within the next few months in an effort to stave off a double-dip recession.
"Fed officials are likely to ease" in the final quarter of this year, Edward McKelvey, an economist with Goldman, Sachs, said on Friday. He said he expects the federal funds rate, the key rate that the Federal Reserve controls, to fall to 1 percent by the end of the year, down from 1.75 percent now.
That is more than most expect, but in the futures market Friday -- where speculators can place their bets on what will happen to that rate -- the December futures forecast a decline to 1.5 percent by year-end. It is the first time that the market has forecast a quarter-point cut from the current level, already extremely low by historical standards.
By contrast, in late March, when the economy seemed to be growing well -- and the Dow was 2,000 points higher than it is now -- the futures market was forecasting substantially higher interest rates by year-end, an increase of at least 1.5 percentage points.
The Federal Reserve's open market committee meets on Aug. 13, and the market consensus is that it will not move then. But the futures market indicates that there is a better-than-50 percent chance that the Fed will cut rates by a quarter point at its September meeting.
Some think such a move should be made quickly. Robert Barbera, the chief economist of Hoenig Securities, said on Friday that the revisions to earlier economic data announced earlier in the week showed that the economy "was never as healthy" as it appeared to be, and that it now "looks rather peaked."
He said he thought the Fed should lower rates at the August meeting.
The stock market weakness on Friday was concentrated in economically sensitive stocks. Within the Dow Jones industrial average, which fell 2.3 percent, the biggest stock declines came from United Technologies, 3M, General Motors, Dupont and other companies vulnerable to a slowdown. By contrast, the three Dow stocks that did the best on Friday -- Philip Morris, Johnson & Johnson and Procter & Gamble -- make products for which a recession would do little to hurt demand.
The consensus forecast still calls for the economy to avoid recession, but the recent news, which has included surprisingly low factory orders, stagnant employment growth and a slowdown in nonresidential construction, has increased the worry level.
The feared `double dip'
"The odds of a double dip are increasing, but I'm not convinced yet," said John Vail, chief strategist of Mizuho Securities USA. "My forecast is for slow, sluggish growth."
David Wyss and Rick McDonald, economists at Standard & Poor's, noted that one disturbing factor in Friday's employment report was a downturn in hiring for temporary jobs.
"Through the first half, temp jobs led the economy," they wrote in a report. "We argued this showed that employers were uncertain, and hiring temps rather than permanent workers. In July, they didn't hire either."
Nonetheless, they expect the economy to stay out of recession and the Fed to keep rates steady for the rest of this year.
The major stock market averages remain above the lows they reached in late July, however, when there was great hand wringing over a lack of investor confidence. Since then, there have been two very strong days, which were not wiped out by Friday's sharp declines.
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