November's 94,000 added jobs statistic is likely to tip the scales in favor of a quarter-point cut in short-term interest rates instead of a half-point cut, economists and analysts say. "The November job creation number, while not outstanding, is more than enough to quell the half-point hawks," economist Steve Affinito told BloggingStocks Friday. "The Fed will cut interest rates by one-quarter point next week."
Affinito said the November 2007 jobs report was "the sole bright spot" after a string of negative economic data recently reported for the U.S. economy. That data points to a slow-growing U.S. economy (or possibly worse) through Q1 2008, many economists agree.
"If we can register 2% GDP growth in the first quarter of next year, that would be acceptable at this point, and I would take it," Affinito said, adding that Q1 could conceivably show a contraction. For Q4 2007 Affinito estimates that the economy will have slowed to 2.3-2.6% growth.
Economic headwinds
A correcting housing sector, subprime mortgage and related asset defaults, high energy prices, sluggish job growth and decelerating corporate profits have slowed U.S. economic growth, with some economists arguing that the U.S. will fall into a recession in 2008.
Those recessionary concerns -- and episodic liquidity problems in the credit markets -- have prompted the U.S. Federal Reserve to lower short-term terms as well as add liquidity to the financial system to insure the proper function of both the credit and equity markets. (Over the past 4 months, the European Central Bank, among other central banks, has also intervened in euro-zone markets to maintain market liquidity.)
Regarding interest rates, the Fed has cut benchmark interest rates twice, starting in September 2007. The Fed funds rate, the rate banks charge each other, now stands at 4.50%, and the discount rate, the rate the Fed charges banks for short-term loans, is at 5.00%.
Affinito said the November 2007 jobs statistics provides some encouragement for the Fed, and for the markets:
"It shows that the economy, staggered as it has been by these recent events, is still able to create jobs. It's not a fantastic job growth, but it's enough to keep the Fed on its incremental easing path, which means a quarter-point rate cut. With 94,000, they can now concentrate on the December data on jobs and Q4 GDP to determine if the economy will require more monetary policy attention."
Fiscal policy
Affinito added that the Fed will also take into consideration the Bush Administration's proposed assistance to the mortgage sector. Subject to review by the U.S. Congress, the Administration has proposed a five-year freeze on at least a portion of subprime loans scheduled to have their interest rates reset. The program is aimed at reducing the flood of mortgage defaults that have produced the biggest housing recession in more than 30 years.
"The Fed will weigh the economic stimulus of the Bush Administration's package, then adjust monetary policy accordingly. Given the time it will take to get the subprime program up and running, the Fed will likely factor-in any fiscal stimulus for the second half of 2008, not the first half," Affinito said. "So any package should not affect Fed policy in early 2008, and the Fed knows it's the key actor on the stimulus stage, at least for the first half of 2008."
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