Thursday: Trepidation About the Fed Grows

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By John J. Edwards III
Staff Reporter

The big ones are finally here. Thursday brings the much-anticipated report on

initial jobless claims

for the week ended Saturday, and Friday features the even-more-anticipated

March employment

report.

The increase last week in the federal funds rate -- to 5.50% from 5.25% -- pushed the yield on the bellwether 30-year Treasury bond solidly above 7%, which in turn sent stocks into a continuing tailspin. With bonds seeming stable but stocks wildly volatile, Wall Street will watch the job data closely for signs of enough economic slowing to stave off another

Fed

rate hike May 20. But an informal poll of economists by

The Street

found precious little to soothe harried traders and investors.

"The economy's gaining momentum really across the board," said Robert Brusca, chief economist at

Nikko Securities

. He expects a strong employment figure of about 280,000 new jobs -- well above the market's consensus comfort level of 200,000 to 250,000. "We're coming off a pretty big gain in jobs in the construction sector, and some people are looking for that to unwind," he explained. His expectation depends on no unwinding, he said.

Brusca expects jobless claims to remain steady at 310,000, but his answer was quick when he was asked what evidence of slowing he sees in the galloping economy: "Nothing." He expects the Fed to raise rates by another 1/4 percentage point in May and to continue tightening throughout the year, reaching a total of a full 1-percentage-point boost.

Frazier Evans, senior economist at

Colonial Investment Services

in Boston, shares the expectation of another 1/4-percentage-point hike in May, but he doesn¿t think the increases will necessarily continue. "They'll have another cautionary raise in May and then maybe they'll rest," he said.

Despite comparisons of the current environment to that of 1994, which saw a series of rate increases that depressed stock prices all year, Evans said there's an important difference. In 1994, the Fed had to double the fed funds rate to a real rate of 3.5% -- the nominal rate minus 2.5% -- to effectively rein in the economy. With last week's rate rise, the real rate now stands at 3%, Evans said. "That tells me they have gotten close to their target, and they won't have to do too much more to have an impact," he said.

Evans expects jobless claims to be "relatively low" and March employment to be "a little bit worse than people expect," but he downplayed the importance of the current reports to the Fed's thinking. "It's really not what's happening now, it's what they expect conditions to be at the end of the year," he said.

David Munro, chief U.S. economist at

High Frequency Economics

in Valhalla, N.Y., said he also expects a rate increase to 5.75% in May. And he also thinks this week's economic data won't have anything to do with it. "I don't think any first-half reports are having any effect on their thinking," he said of the Fed governors. "They're concerned about how much growth they might have by the end of the year and they want to pare it down." Munro expects jobless claims of 310,000 to 311,000 and 200,000 new jobs in March.

Mickey Levy, chief financial economist at

NationsBank

, disparaged the very idea of trying to predict how many jobless claims there were in any given week. Economists are just throwing darts in the dark "unless they go to the different unemployment offices and stand there," he said. Levy does estimate a March employment figure of 300,000: "If it comes out higher than that, the market will be shaken badly."

But Levy stands apart from most of his peers in expecting the Fed

not

to increase rates May 20. The reason? Inflation is under control. Really. "People are inexorably linked to the idea that strong real growth has to lead to inflation, and it doesn't," he said.

James Griffin, vice president and economist at

Aeltus Investment Management

in Hartford, Conn., joined Levy in pooh-poohing specific forecasts but reflected the consensus on a May hike: There will be one. "It's the momentum of the economy, the momentum of forces that I think the Fed has to conjure with, and the Fed has to basically strategize with their response," he said.

Thursday's numbers

:

Mortgage Bankers Association application volume indices

(morning): The measure of purchase and refinance applications for the week ended Friday. The prior week's purchase index was 197.2. The 52-week high was 220.5, set Nov. 29; the 52-week low was 156.8, set Dec. 27. The prior week's refinance index was 396.7. The 52-week high was 619.7, set Dec. 6; the 52-week low was 186.1, set July 12.

Initial jobless claims

(8:30 a.m. EST): For the week ended Saturday. The consensus median estimate is 311,000, compared with 310,000 in the prior week.

Domestic automobile and truck sales

(afternoon): For March. For auto sales, the consensus median estimate is 7.0 million versus 7.1 million in February. For truck sales, the consensus median estimate is 6.3 million versus 6.2 million in February.