Advice to the Fed: Once More, With Feeling

Sure, it doesn't look likely, but there's still a chance the Federal Reserve, come Aug. 21, will see fit to cut the fed funds rate by 50 basis points to 3.25%. A 50 point cut may not be probable at this point, but today's jobs report doesn't leave one very hopeful about the economy.

Not that bad, you say? Well, sure, if you don't think about the fact that government jobs, owing to seasonal adjustments, were all that prevented this report from looking particularly lousy. Manufacturing continues to shed jobs, especially in the electrical and industrial machinery areas (in our parlance, that's high-tech), and the service and construction sectors have been stagnating.

Take that, along with expectations for poor retail sales, a poor corporate outlook and sagging growth in the economy, and there's not much to point to that's optimistic. "Where is [the Fed] getting positive feedback?" wondered Joel Naroff of Naroff Economic Advisors, this morning.

What makes predicting a 50 point cut difficult (and one my colleague Aaron Task is likely to proffer) is that the Fed's done a lot of work already. The economy is close to a recession, but the Fed, as requested, has been given impossible tasks: restore capital spending in an area that's glutted with the stuff, and silence some of the yammering fools on television who believe the Fed is screwing up every day that the stock market isn't rallying (I'm looking in your direction, Mr. Kudlow).

Regardless, the Fed may feel it's necessary to make one more bold move to restore a bit of confidence, however fleeting it may be, and ultimately to get the funds target to a place where it feels the rate cuts will jump-start growth. Unfortunately, the Fed is starting to move into insecure territory here -- at 3.75%, the funds target is accommodative already. But some more accommodation is needed at this point. The Fed maintained a 3% funds rate for more than a year beginning in 1992, but that was largely viewed as necessary because of the sorry state of the banking sector.

Now the situation is more complicated -- there's wage inflation without inflation in goods; liquidity has increased, but demand has not; and the stock market continues to reel. People may blame the Fed, but it can only do so much -- the Fed cannot force companies to spend during bad times, just as it can't force them to pull back from ridiculous investments in good times. But it can do a little more -- and one more big move may be the Fed's message that it's finished.

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