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Fed may address weaknesses in the US economy

Federal Reserve policy makers are likely to leave interest rates unchanged this week while raising the possibility that they may push rates lower at some point to counter new evidence of a weakening economy.

The economy slowed in July as manufacturing and services stalled and about 6,000 jobs were created, less than a tenth as many as a month earlier. Wholesale prices, minus food and energy, fell 0.3 percent, the most since October, as manufacturers reduced costs for their customers to stimulate sales.

Today's meeting of the Fed's policy-setting Open Market Committee is turning into one of the most closely watched of the year. Nine of the 22 banks and securities firms that trade with the Fed expect central bankers to take the first step toward a rate cut and say the risks of a slowdown outweigh the threat of inflation resulting from faster growth. Richard Berner, chief US economist at Morgan Stanley in New York, predicts the Fed will lower the benchmark overnight bank lending rate by a half percentage point as insurance against a slip back into recession.

"The stock market and the economy are not showing up where Wall Street wants it, and they are throwing a temper tantrum," said Diane Swonk, chief economist at Bank One Corp in Chicago, who expects the Fed to leave the overnight rate at a 41-year low of 1.75 percent. "The short-sightedness of Wall Street is really showing up now."

Berner is the only economist at one of the Fed's so-called primary dealers who forecasts a rate cut today. One other among the 67 economists in a Bloomberg News survey, Robert McGee, senior strategist at UFJ Bank in New York, also expects a reduction.

They aren't entirely alone. Deutsche Bank Securities, Dresdner Kleinwort Wasserstein Securities LLC, Lehman Brothers Holdings Inc and Goldman, Sachs & Co. have said they anticipate the Fed will lower rates before year-end.

And the 1.57 percent implied yield on the October federal funds futures contract indicates that investors are betting on a rate cut by September.

This year's 21 percent drop in the Standard and Poor's 500 stock index, which may lead to the S&P's third consecutive annual decline, is one reason economists are divided about tomorrow's Fed meeting.

Most economists say the recession that began in March 2001 ended at the start of this year. A growing number say falling stocks will constrain consumer and business spending, and cause the economy to expand at a slower pace than Fed officials expected as recently as last month.
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