NEW YORK (Reuters) - A sputtering job market has convinced economists at key U.S. investment banks that the Federal Reserve will need to resort to a steeper half-percentage point interest rate cut when it meets later this month.
Both Goldman Sachs and JP Morgan said on Friday they now see the Fed slashing the benchmark federal funds rate down to 3.75 percent from the current 4.25 percent, with Goldman also considering the possibility of an intermeeting move.
Goldman sees three further rate cuts after January, of 25 basis points each, bringing the fed funds rate to 3.00 percent by mid-year.
JP Morgan expects a 25 basis point rate cut in March. It also revised its growth forecasts — raising fourth-quarter 2007 growth to 2 percent from 1.5 percent while lowering first quarter growth to zero from 1 percent.
Employment growth all but stagnated in December, according to the Labor Department, as the economy generated just 18,000 jobs last month, renewing fears that recession could lie ahead. The jobless rate rose to a two-year high of 5 percent.
The Fed already has cut the fed funds rate by a full percentage point since mid-September as policy-makers aimed to soften the blow to the U.S. economy of a slumping housing sector and a global tightening of credit conditions.
Reporting by Tamawa Kadoya and Pedro Nicolaci da Costa; Editing by Andrea Ricci