FED WATCH: Weak Jobs Don't Sway Economists From Fed View

NEW YORK (Dow Jones)--The March payrolls report painted a dismal portrait of the economy's current state, but economists believe the chances of an imminent Federal Reserve rate haven't grown any stronger.

That's true even as the report comes on the heels of a toxic tsunami of statistics which pointed to weakness in both the nation's manufacturing base and service sector, which accounts for two-thirds of U.S. economic output.

The Labor Department reported Friday that non-farm payrolls declined by a bigger-than-expected 108,000 jobs, while February's payrolls losses were revised to a 357,000 decline. For March, the unemployment rate held steady at 5.8%.

Economists were in agreement that the report was weak, given the breadth of the losses and the revision to the prior month's already dismal reading of the labor market. But they put the data in the context of an economy that's been weakened by worries about war.

"I'm not so sure this figure puts a lot of pressure on the Fed to ease" despite the fact that the jobs data and other reports have not been pretty, said William Sullivan, economist with Morgan Stanley in New York.

"Fed officials...have seemed to suggest that any weakness in the economy in the opening months of calendar year 2003 is attributable to geopolitical uncertainties" and because of that it seems like the central bankers can live with this jobs number, he said.

A modest majority of economists at Wall Street's biggest banks have long believed that the Fed, based on its official statements and the remarks of its policy makers, was willing to keep interest rates steady for sometime. The Fed argues that once the war is resolved, the fundamental soundness of the economy should emerge more clearly.

Some Fed officials have in recent days reminded markets the central bank would be willing to cut rates again if conditions warranted it. But they did so in comments that stressed their preexisting views about the influence of war fears on the economy, and noted once again their longer-term optimism. .

Financial markets, for their part, sent some conflicting signals Friday about their views regarding monetary policy, suggesting some continue to buy into the argument that the weakness in the economy can't all be attributed simply to the war, both the uncertainty leading up to it and the actual conflict itself. Bond traders have been pricing in robust odds of a rate cut either before or at the early May Federal Open Market Committee meeting and some clearly still believe in that thesis.

Fed fund futures contracts - a key barometer of future interest rate expectations - continue to believe that there's a high likelihood of a rate cut at the May 6 FOMC. The futures market prices reflect 65% chance for a quarter percentage point cut in May, and 90% for a rate cut at the June 24-25 Fed gathering, if the Fed doesn't move in May.

The Treasurys market meanwhile followed the jobs report with a strong bout of volatility. First the market ignored the data and focused on the war and its apparent successes, as U.S. troops have entered Baghdad and captured its airport. The market regained some of its bid after an Iraqi officials threatened the use of unconventional means to dislodge the troops from the capital, but didn't appear to bet that this report would tip the Fed's hand.

"The market is just looking past this data" and is concentrating on war developments, said Gerald Lucas, senior government strategist at Merrill Lynch in New York.

Priya Misra, fixed-income strategist at Lehman Brothers in New York, agreed that war and not monetary policy was the bond market's paramount focus. "We are seeing the threat of a longer war in Iraq being priced out with the market focusing upon better prospects for the economy once the war ends," she said.

To be sure, some prominent economists believe there's still a lot to be worried about in the economic outlook. They argue that regardless of the cause of the weakness, the Fed will eventually have to respond to the ugly turn numbers have taken over recent months.

Lou Crandall, chief economist with Wrightson ICAP in Jersey City, N.J., warned that "barring a major breakthrough in Iraq over the weekend, we believe that the odds favor an intermeeting rate cut early next week." He said that "Monday seems the most likely date, but we would not give up on the view until Tuesday afternoon."

U.S. Treasury Secretary John Snow said on Thursday as he promoted the Bush Administration's beleaguered tax cut plan, that the economy's problems do indeed go deeper than the Iraq war. He said "the problem is not with the concern about the Iraq war. The problem is the underlying weakness with the economy." . .

-Michael S. Derby, Dow Jones Newswires; 201-938-4192; . michael.derby@dowjones.com .

[Chances of a rate cut haven't grown any stronger] even as the report comes on the heels of a toxic tsunami of statistics which pointed to weakness in both the nation's manufacturing base and service sector, which accounts for two-thirds of U.S. economic output.

Treasury Secretary John Snow said [snip] that the economy's problems do indeed go deeper than the Iraq war. He said "the problem is not with the concern about the Iraq war. The problem is the underlying weakness with the economy."

Snow Reiterates View That US Economy Is Growing Too Slow

NEW YORK (Dow Jones)--U.S. Treasury Secretary John Snow reiterated Friday his view that the U.S. economy's problems go deeper than war worries.

"Our economy is not growing fast enough or quick enough," Snow said to reporters at the Beach Community Center in Fort Lauderdale, Fla. But he added that "I don't think we are headed toward a double-dip (recession)."

"The economy has certainly slowed some, and isn't performing where we would want it to perform," Snow said, as he continued a tour of Florida to drum up support for the administration's tax-cut proposal, which has been halved in the Senate.

His remarks come after the release of dismal March jobs data, something the Treasury Secretary didn't directly address. The Labor Department reported Friday that nonfarm payrolls declined by a bigger-than-expected 108,000 jobs, while February's payrolls losses were revised to a 357,000 decline. For March, the unemployment rate held steady at 5.8%. .

-By Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com .

(END) Dow Jones Newswires

04-04-03 1205ET- - 12 05 PM EST 04-04-03

I would not hold my breath for a rate cut.

Oil has come down fairly briskly. This is significant stimulation.

I predict more hand wringing and fence sitting by the Fed till the dust settles a bit.

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