Surveyed economists expect Fed to cut rates this week

ByABC News
October 27, 2008, 5:01 AM

— -- Federal Reserve policymakers this week are likely to cut interest rates as the economy slumps into a recession marked by the first decline in consumer spending in 17 years, according to a new USA TODAY survey of 45 economists.

Asked what Fed Chairman Ben Bernanke and his colleagues will do at the end of their two-day meeting on Wednesday, 82% say they expect a cut, including 44% who foresee a half-point reduction and 38% who are looking for a quarter-point cut.

The larger cut would reduce the target for short-term interest rates to 1%, a level not seen since mid-2004.

"The financial crisis has finally pushed the economy over into a real recession," PMI Group chief economist David Berson says. He expects the Fed to cut by a half-point.

The survey of economists from businesses, trade associations and universities, conducted last week, shows a significant deterioration in their assessment of the economy since a similar survey in July. All but one now say the USA is in a recession, vs. 51% who said that in July.

The economists' consensus view is that the U.S. economy contracted 0.5% in the July-September quarter. As a group, they forecast further contraction in the last quarter of 2008 and the first quarter of 2009. The government on Thursday will release its initial estimate of gross domestic product in the third quarter.

That report will also include the government's measure of consumer spending for the quarter, and the consensus view of the economists is that it will show a decline of 2.7%.

It would be the first quarterly drop since the end of 1991, when the economy was recovering from a recession. Consumer spending accounts for more than two-thirds of U.S. economic activity.

Employers are expected to cut jobs for another year, the economists say, pushing the jobless rate above 7% next year for the first time since 1993. The rate was 6.1% in September.

"This is going to be a wake-up call," says William Hummer, chief economist at Wayne Hummer Investments. "The days when you can leave your job for equal or better pay are gone for a while."