America is rediscovering its puritanical roots.

The Consumer Price Index’s 1% drop in a single month grabs headlines, but nine-tenths of that relates to falling food and energy prices. More worrying is the 0.1% drop in the core index, with shopaholic fixes like clothing, hotel stays and vehicles all falling. Airline fares decreased by 4.8%, despite large cuts to capacity.

For now, annual inflation, while down sharply from September’s 4.9%, is still positive at 3.7%. Energy and food will continue to have a big impact. Adjusting their respective weights in the basket for price moves this year, a return of these key items back to October 2007 levels would take another 1.8% off.

The risk of wider deflation is now unmistakable. The American consumer — roughly 70% of the domestic economy — is switching away from asset-fueled sprees to living on regular income. Consumer borrowing is down 1.5% year-on-year, a pace of decline last seen in the early 1990s recession.

The big question is how quickly shoppers can be lured back to the malls. So far, rapid monetary easing hasn’t worked. Neither the tax rebates sent out earlier this year nor the implied stimulus of lower gasoline prices — worth an annualized $283 billion based on the decline since July’s peak — has had a radical effect.

David Rosenberg, Merrill Lynch’s North American economist, reckons annual CPI could hit 0% within a year, as commodity prices fall, but also as rising unemployment erodes spending power further. Official lending rates, already near zero, will likely fall further. But with the consumer recession still in its infancy, the case for a big expansion in fiscal-stimulus programs is strengthening by the day.
By Liam Denning
OF THE WALL STREET JOURNAL

WASHINGTON — Given new expectations that the U.S. economy could contract for as much as a year, Federal Reserve officials stand ready to slash interest rates to levels not seen in half a century, minutes of their most recent policy meeting show.

Meanwhile, officials suggested that the economy could be in for a rather lengthy recession and sharplydowngraded their economic forecasts. The minutes, which were released Wednesday with the customary three-week lag, show that officials generally expect the economy to contract in the second half of 2008 and the first half of 2009. And some officials expect that the economic weakness “could persist for some time.”

Some officials voiced concern that future cuts might do little to put the ailing economy on a healthier path, according to the minutes. And with the target federal funds rate already at 1%, some officials pointed out that the Fed has “limited room” to lower further and should therefore move slowly. Still, others said more aggressive easing could help reduce borrowing costs as well as the odds of a deflationary outcome.

Either way, the Fed has made it clear that it is “unequivocally biased” to further rate cuts, wrote UniCredit Markets and Investment Banking economist Harm Bandholz in a research note.

“The minutes show that not even this historically low level has to be the end of the Fed’s easing cycle,” said Bandholz, adding that he expects the Fed to cut its target rate another 50 basis points at officials’ Dec. 16 meeting.

In their Oct. 28-29 meeting, officials said that “unfolding economic developments” could require the Federal Open Market Committee “to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities.”

Fed officials said they anticipate that economic data would show “significant weakness in economic activity” and that additional policy easing could well be necessary, according to the meeting minutes.

Meanwhile, they said they expect inflation to diminish in coming quarters.

“In any event, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy,” the minutes said.

Overall, officials found that risks to the economy had greatly escalated and the credit crisis had morphed into an “international phenomenon,” leaving them little choice but to cut interest rates to four-year lows.

As the credit crisis worsened last month, the FOMC voted unanimously Oct. 29 to lower the target federal-funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest level since the period between June 2003 and June 2004. The decision came in wake of Lehman Brothers Holdings Inc.’s (LEHMQ) September collapse, the near-failure of insurer American International Group Inc. (AIG) and new concerns about the conditions of other financial firms.

The Fed officials agreed that “significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures,” the minutes said.

They also noted that the credit crisis expanded globally since their September policy meeting, at which they held rates steady.

“The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period,” the minutes said. “This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on Oct. 8.” That day, Fed officials agreed to an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England.

Meanwhile, the Fed downgraded its 2008 forecasts for gross domestic product and the unemployment rate, according to a quarterly forecast the Fed released Wednesday.

The central tendency of officials’ forecast is for gross domestic product growth this year to stand between 0.0% and 0.3%, which is lower than its June projection of a 1.0% to 1.6% range.

Meanwhile, they slashed their GDP growth projection for 2009 to a range of -0.2% to 1.1%. In June, they had seen a 2.0% to 2.8% range for 2009.

Officials also raised their forecasts for the unemployment rate. They now see the unemployment rate between 6.3% and 6.5% in 2008, up from the previous forecast of 5.5% to 5.7%, the Fed said.

Amid a deteriorating economy, the unemployment rate had already surpassed the Fed’s previous forecast. Earlier this month, the Labor Department reported that the unemployment rate in October soared 0.4 percentage point to 6.5%, the highest level since March 1994.

By Maya Jackson Randall
Of DOW JONES NEWSWIRES

WASHINGTON — The retreating economy chased U.S. consumer prices down by the most in 61 years during October, sending home construction to an all-time low.

The consumer price index dropped 1.0% on a seasonally-adjusted basis compared to the previous month, the Labor Department said Wednesday. The core CPI, which excludes food and energy costs, fell 0.1%.

A separate Commerce Department report showed housing starts fell a fourth straight time, down 4.5% to a seasonally-adjusted 791,000 annual rate, a record low.

“It’s consistent with sharper deterioration in economic activity,” said Scott Brown, chief economist at Raymond James.

The 1.0% drop in consumer prices was the largest since February, 1947. Energy prices plunged 8.6% — a drop much greater than the 1.9% fall in September, when hurricanes in the Gulf of Mexico interfered with energy production and slowed the decline in energy prices. Gasoline prices in October plummeted 14.2%.

Food prices climbed 0.3% last month. Transportation prices decreased 5.4% on the month as airline fares dropped 4.8% and new vehicle prices fell by 0.5%. Housing, which accounts for 40% of the CPI index, was unchanged.

Medical care prices increased 0.2%, while clothing prices fell 1.0% compared to September.

“This report clearly reflects the crunch in discretionary consumers” spending, which is likely to persist for the foreseeable future,” said Ian Shepherdson, an analyst at High Frequency Economics.

Consumer spending, once a big engine for the economy, started a dive last summer. The economy in the third quarter declined, falling 0.3%, and the experts contend it has kept shrinking during the current, fourth quarter, which started Oct. 1. The first reading on gross domestic product, the government’s broad measure of the economy, won’t be available until late January.

The declining inflation numbers give the Federal Reserve room to chop interest rates again and give the economy another kick. Late last month, the Fed slashed the fed funds rate by another 0.50 percentage point to 1%.

The housing slump has gotten some blame for the economy’s downturn. Commerce data show that, year over year, housing starts last month were 38.0% below the level of construction in October, 2007.

It appears that the slide in construction will continue.

Building permits, a sign of future construction, declined 12.0% in October to a 708,000 annual rate in October, the Commerce Department data on starts showed.

“This report is a shocker,” IHS Global Insight economist Patrick Newport said.

Builders have been cutting back because sales and prices of new homes keep falling. The latest government report on new-home sales in the U.S. showed demand in September was 33.1% below the year-earlier level. The median price was down 9% over those 12 months. Inventories of unsold homes are high. The economy’s slump is sending the unemployment rate higher. Meek consumers awash in debt don’t want too spend, and on top of all that, securing financing is harder these days.

Starts of single-family homes decreased by 3.3% in October to 531,000. Construction of housing with two or more units fell 6.8% to 260,000.

“With sales very slow, and with the recent credit market dislocations and tighter lending standards, single-family housing starts will probably drop somewhat further,” Insight Economics analyst Steven Wood said. “Housing’s contribution to economic growth will be significantly negative again in (the fourth quarter). The silver lining is that with housing starts now off more than 65% from their peak, housing construction should be pretty close to a bottom.”

By Jeff Bater
Of DOW JONES NEWSWIRES

 WASHINGTON — U.S. producer prices posted a record drop last month, sliding for a third straight month as raw material and energy prices tumbled.
While core prices remained higher, price pressures deeper in the production pipeline continued to decline sharply. Raw materials registered another record drop in prices, while energy prices posted the biggest decline in over 22 years.

The report suggests the weakening economy and falling energy prices should continue to drag down inflation in coming months, which should allow the Federal Reserve to keep its focus on spurring growth and containing the financial crisis.

The producer price index for finished goods slid 2.8% on a seasonally adjusted basis in October, topping the previous record drop of 1.6% in October 2001, the Labor Department said Tuesday. The index fell 0.4% in September.

The drop in October was also substantially more than the 1.8% decline predicted by economists in a Dow Jones Newswires survey.

Still, the PPI remained up 5.2% from October 2007, reflecting big increases in the spring, when energy prices were at record highs.

The core PPI advanced 0.4% last month from September, compared with expectations of a 0.1% increase. It was up 4.4% from a year ago.

Last week, a government report showed a record drop in import prices in October. Consumer prices to be released Wednesday are also expected to fall amid an ongoing drop in oil and commodity prices.

With the U.S. economy considered by most economists to already be in a recession and credit markets remaining severely strained, many market participants expect the Fed to continue to cut rates.

Late last month, the Fed slashed the fed funds rate by another 0.50 percentage point to 1%, its lowest level in four years. The statement said declines in energy and other commodities, combined with a deteriorating economic outlook suggests inflation will “moderate in coming quarters to levels consistent with price stability.”

Last week, Philadelphia Fed President Charles Plosser considered somewhat of an inflation hawk, said falling energy and commodity prices have “reduced my own concern about rising inflation expectations — at least in the near term.”

The PPI data showed energy prices posting a 12.8% drop last month, its biggest decline since July 1986, after falling 2.9% in September. Wholesale gasoline prices slid a record 24.9%. Food prices, meanwhile, were down 0.2%.

Prices of passenger cars fell 1.7%, while light truck prices gained 2.6%.

Deeper in the production pipeline, declining prices suggested that disinflationary pressures should continue. Prices of raw materials, known as crude goods, fell a record 18.6% on the month. Core crude goods prices also posted a record decline of 17.0%.

Intermediate goods prices fell an unprecedented 3.9%. Core intermediate goods decreased 1.8%.

By Tom Barkley
Of DOW JONES NEWSWIRES

 NEW YORK — The U.S. economy is in the midst of the worst part of the recession, but growth may return by the second half of next year, according to economists in the latest Wall Street Journal forecasting survey.

“The intensity of decline will wane,” said Stephen Stanley of RBS Greenwich Capital. “We’ve cut out a lot of the low-hanging fruit, and it gets progressively tougher to see such rapid rates of decline.”

On average the 54 economists surveyed expect gross domestic product to decline 3% at an annualized rate in this year’s fourth quarter. That comes after the Commerce Department reported a 0.3% drop in the third quarter. Another negative reading is forecast for the first three months of next year with an essentially flat reading for the second quarter. Slow growth is seen for the second half of 2009, reaching 2.1% by the fourth quarter.

“By the third quarter of next year a recovery will be under way,” said John Lonski of Moody’s Investors Service, but he added that expansion won’t return to pre-crisis levels until 2010.

A number of economists surveyed gave a much more pessimistic forecast, due in part to pressure on consumers. “We’re not only in an economic downturn, but a serious banking crisis. The idea that you can just have a couple of quarters of negative growth and then we’re off to the races is just too optimistic,” said Paul Ashworth of Capital Economics, who is predicting GDP contractions throughout next year.

Government action is one reason why some economists see the landscape eventually improving. Nearly two-thirds of respondents say the Treasury Department’s Troubled Asset Relief Program, which has taken stakes in major financial institutions, is helping markets.

“The cost of doing nothing is greater than the cost of doing something, as we saw in the case of Lehman,” said Diane Swonk of Mesirow Financial, referring to the collapse of Lehman Brothers Holdings Inc. in September. “The idea is still to save the core ideas of a market-based economy, even if that means using government as a bridge to get there.”

Economists were supportive of more government stimulus. More than 80% favor a stimulus package in January, even if one is passed before the end of 2008. Some 34% of respondents said the top priority in such a package should be permanent tax cuts. On average, economists said the total size of government stimulus this year and early next should be more than $250 billion.

“By the second half of next year the impact of measures to stimulate the economy should become evident,” Lonski said.

Economists saw other factors boosting the chances of recovery. “Stimulus will help, but it won’t get us out of the problem. It’s tantamount to taking aspirin, as it will only temporarily ease pain,” said California State University’s Sung Won Sohn, who cited rebuilding confidence as essential for recovery.

President-elect Barack Obama “needs to extend unemployment, work to stem foreclosures and use other plans to demonstrate that he’s doing something. To stabilize confidence, you need programs to ease pain. People see that they can count on you, and confidence recovers,” he said.

Confidence is in short supply these days. In October, the Conference Board’s measure of consumer confidence posted the lowest reading since the survey began in 1967. Consumer spending also has suffered, recording a 0.3% decline in September.

Mounting job losses have exacerbated the consumer downturn, and even though economists are forecasting some improvement by late next year, the picture for the labor market remains grim. On average, respondents expect the unemployment rate to rise to 7.7% by December 2009, up from 6.5% last month, while they see the economy shedding more than 100,000 jobs a month over the next year.

If the economists’ average forecast were to materialize, the depth of the downturn would be about on par with the 1990 recession, but it wouldn’t reach the low levels seen in the early 1980s or 1970s.

“We’re at the very beginning of this process of unwinding a credit bubble and an asset-price bubble that took place over decades. It got out of control in the last five years, but it didn’t appear in the last five years,” said Joshua Shapiro of MFR Inc., who also is forecasting a shrinking economy through all of 2009. “People think in terms of a calendar as opposed to economic fundamentals. The cycle doesn’t know from the calendar.”

By Phil Izzo
Of THE WALL STREET JOURNAL

WASHINGTON — U.S. Treasury Secretary Henry Paulson Wednesday signaled that the department is ready to enter the second phase of its $700 billion bailout plan, but it is unlikely to include the original proposal to buy up troubled assets from the balance sheets of banks.

Instead, Paulson pointed out that the asset-backed securitization market — particularly the non-bank consumer finance sector — is facing considerable challenges, which is raising the cost and reducing the availability of car loans, student loans and credit cards. He said Treasury is looking at ways to possibly use the financial-rescue program funds to encourage private investors to return to that troubled market.

“Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions,” he said.

To prop up the consumer finance sector, Treasury is considering working with the Federal Reserve to create a new liquidity facility for highly-rated AAA asset-backed securities, said Paulson.

Additionally, Paulson said Treasury is still evaluating ways to help mitigate foreclosures and also considering programs that could use funds from the rescue program known as the Troubled Asset Relief Program, or TARP, to help attract private capital into financial markets.

“We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments,” the secretary said in a broad speech on TARP, the global credit crunch and the government’s recent steps to address the financial meltdown. “In developing a potential matching program; broadening access in this way would bring both benefits and challenges.”

Paulson said it could be more difficult for the government to protect taxpayers under a program that provides funds to non-bank financial firms because many are not directly regulated and are involved in a wide range of businesses. At the same time, those firms provide credit “that is essential to U.S. businesses and consumers,” he said.

He also said that the first $250 billion program to inject government cash into financial firms should be completed before embarking on the second program to funnel funds to non-banks so that officials can thoroughly assess the impact and evaluate the size and focus of the new program.

Paulson said Treasury’s initial idea to purchase firms’ illiquid assets doesn’t seem like it would be very effective.

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending,” he said, according to his prepared remarks.

Meanwhile, Paulson encouraged all banks to engage in responsible lending as a way to revive credit markets and the broader economy. Earlier Wednesday, federal regulators released a joint statement encouraging banks to continue to lend to businesses and households.

“All banks — not just those participating in the Capital Purchase Program — have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation,” said the secretary. “I am particularly focused on the importance of prudent bank lending to restore our economic growth.”

Paulson: Will Likely Take Weeks To Design New Fed Facility

WASHINGTON — U.S. Treasury Secretary Henry Paulson said Wednesday it could take weeks for federal officials to design a new Federal Reserve liquidity program for asset-backed securities.

Paulson, in a wide-ranging speech, announced that the Fed and Treasury are exploring ways to boost the non-bank consumer finance market, possibly through a new Fed program.

“We are looking at ways to possibly use the TARP (Troubled Asset Relief Program) to encourage private investors to come back to this troubled market,” he said, noting that the consumer finance market continues to face funding issues that are raising the cost and reducing the availability of car loans, student loans and credit cards.

In response to a reporter’s question after the speech, Paulson added that it could take weeks to design the new facility, “and then it will take longer to get it up and going.”

“These things are complicated,” Paulson continued, adding that the program would have to be of significant size to be truly effective.

Paulson: “No Easy Answer” For Foreclosure Problems

WASHINGTON — U.S. Treasury Secretary Henry Paulson said Wednesday that while the department is continuing to consider ways to help stem foreclosures, there is “no easy answer” to the crisis and most of the proposals involve significant trade-offs.

Paulson said a number of proposals to help mitigate foreclosures would require substantial government subsidies, including a plan floated by the Federal Deposit Insurance Corp. to help millions of people move into more-affordable mortgages.

The FDIC proposal, which reportedly would cost between $40 billion and $50 billion and have the government agree to share a portion of any losses on a modified mortgage offered by lenders, is “not perfect,” Paulson said in response to reporters’ questions Wednesday.

He added that the FDIC plan is “a spending plan,” while the $700 billion financial-rescue program is an investment program. “TARP [Troubled Asset Relief Program] was investment, not spending,” he said. But “we’re continuing to work through that.”

Paulson added that initially, Treasury believed it would be purchasing illiquid mortgage-related assets from banks’ balance sheets, which could have helped pave the way for more aggressive mortgage-modification standards.

But in his prepared remarks to media at the Treasury Department, Paulson announced that Treasury is unlikely to move forward with its original plan to buy soured mortgage debt.

“Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment,” the secretary said.

He added that there are “no easy answers’ when it comes to stemming foreclosures.

“I can’t tell you how many proposals I’ve looked at,” he said.

Still, Paulson said he is focused on the issue.

“Foreclosure prevention is something I’m going to keep working on right up until I leave [office],” he said.

Paulson: Legislative Action One Option For Auto Indus Help

WASHINGTON — U.S. Treasury Secretary Henry Paulson Wednesday outlined legislative action as a way to deliver emergency government funds to the auto industry.

Meanwhile, he said the department’s $700 billion bailout program was intended for financial firms, not automobile companies.

He noted that Congress recently passed legislation to provide $25 billion to auto manufacturers.

One option for getting additional cash to Detroit would be “to amend that bill and make it [the new funds] available,” Paulson said during a press briefing.

The secretary said the Bush administration believes the auto industry is critical to the U.S., but any solution to the industry’s deep troubles needs to lead to long-term viability.

By Maya Jackson Randall
Of DOW JONES NEWSWIRES

European central banks cut their key interest rates sharply, and Democrats readied a plan to inject $60 billion to $100 billion into the sagging U.S. economy, as leading industrialized nations tried anew to stave off a global downturn now predicted to be the worst since the end of World War II.

The Bank of England surprised markets by lowering its key lending rate by one and a half percentage points, to a 54-year low of 3% from 4.5%, in its biggest cut since 1992. The European Central Bank cut its key rate for countries that share the euro currency by a half percentage point, to a two-year low of 3.25%, while Switzerland’s central bank also cut its main target rate by a half-point in an unusual between-meetings move. In Seoul early Friday, the Bank of Korea lowered its main interest rate for the third time in a month.

The International Monetary Fund urged nations to go further by turning to fiscal measures, such as boosting spending and cutting taxes, to prevent a world-wide tailspin in economic growth. The IMF put out a new global forecast Thursday predicting that the economies of the world’s “advanced economies’ — 31 nations including the U.S., Western Europe and Japan — would contract by a combined 0.3% in 2009. That would be the first year those economies shrank as a group since the IMF was founded in 1945.

In the U.S., President-elect Barack Obama was to huddle with his economic advisers Friday. House Speaker Nancy Pelosi sketched out a two-pronged stimulus strategy in an interview Thursday with The Wall Street Journal. She plans to push Congress to approve a program worth $60 billion to $100 billion this month, followed by another that could include tax cuts after Mr. Obama is inaugurated in January. He had promised a new stimulus package during the campaign.

Meanwhile, gloomy economic news continued. In the U.S., retailers Abercrombie & Fitch and the Gap reported double-digit sales declines last month in stores open for at least a year. Discount giant Costco saw sales drop by 1%, the first decline since Thomson Reuters began collecting data in 1997. On Friday, the government will announce the unemployment rate for October, which Goldman Sachs estimates will jump to 6.4% from 6.1%.

In Europe, weaker foreign demand helped push manufacturing orders in Germany, Europe’s largest economy, down by 8% in September from August, the steepest slide since records began in 1991. Britain’s biggest mortgage lender said house prices fell by a record 14.9% in October compared with last year, the biggest fall since records began in 1983.

Recession weighed on the minds of investors world-wide, who dragged down markets despite the dramatic rate moves. Many worried central banks could quickly run out of ammunition to prop up struggling economies.

The European interest-rate cuts didn’t do much to help stocks. The pan-European Dow Jones Stoxx 600 Index lost 5.6%, to 215.47. The U.K.’s FTSE 100 Index fell 5.7% to 4272.41. In the U.S., the Dow Jones Industrial Average sank 4.85%.

The IMF estimated that global growth would advance just 2.2% next year — well below the line that the IMF traditionally considers a recession. At different times, the IMF has defined a recession as 2.5% or 3% global growth, but the fund’s chief economist, Olivier Blanchard, wouldn’t dub the current downturn a recession. He didn’t explain his reasoning, but the IMF, which represents 185 nations, tries to avoid what could be seen as politically charged pronouncements.

Former IMF chief economist Michael Mussa, now an economist at the Peterson Institute for International Economics, a Washington, D.C., think tank, wasn’t as constrained. “Growth as sluggish as they’re projecting should be defined as recession,” he said. In IMF data going back to 1970, global economic growth hasn’t fallen below zero; its low was 0.9% in 1982.

Thus far, aggressive loosening of monetary policy around the globe has done little to ease market concerns or buoy growth. Partly that may be a matter of timing. Interest-rate reductions can take between six to 18 months before they have a measurable effect on economic activity, economists estimate.

But monetary policy also may be insufficient to tackle today’s global credit crunch, in which financial institutions are wary of lending. The aversion of borrowers and lenders to taking risks can swamp the stimulative effect of interest-rate cuts, which are meant to reduce borrowing costs for banks and businesses.

ECB President Jean-Claude Trichet on Thursday urged commercial banks to lend to one another more freely. “I would ask the banks to be up to their responsibilities to fully take into account what we and governments have decided,” he said.

Until fairly recently, few central banks outside the U.S. were cutting rates. Between August 2007 and September 2008, the Fed pushed interest rates down by more than three percentage points. Interest rates outside the U.S. during that time actually increased by a little less than a quarter percentage point, according to a J.P. Morgan Chase & Co. tally of central banks in 30 large countries.

The shift in the past few weeks has been stark. J.P. Morgan estimates that globally, rates went down by more than half a percentage point in October alone. The latest moves by the U.K., ECB and others add to that. More easing looks certain.

It’s far from clear how many nations will try to match interest-rate cuts with the fiscal boost the IMF recommends. The IMF said such moves have been “limited.”

The U.S. pushed through a $168 billion stimulus package earlier this year, equal to about 1% of gross domestic product. That boosted consumer spending in the spring, but may not have done much longer-term good. Now some economists are arguing that Democrats’ new plan may be insufficient too.

Peter Hooper, chief economist at Deutsche Bank Securities, is suggesting spending equal to about 3% of GDP, or roughly $450 billion, over the next year — and an additional fiscal stimulus in 2010 worth 2% of GDP.

Federal Reserve Chairman Ben Bernanke last month endorsed a new stimulus package and said its size “should be significant.” He said any fiscal stimulus package should be designed to support the economy quickly, but avoided suggesting specific components.

European fiscal stimulus efforts so far have been uneven. Germany’s cabinet on Wednesday, for instance, approved a stimulus package including tax breaks and state-backed loans totaling around 23 billion euros (around $30 billion). But Germany’s finance minister rejected appeals for more income-tax relief, saying households would probably save the money gained by such a measure instead of spending it.

France has proposed only limited steps to stimulate its economy, including buying up 30,000 half-built homes in 2009 to help property developers. On Thursday, the government also said it would forge ahead with a different kind of plan: A wealth fund aimed at protecting national companies against foreign predators, starting with a 110 million euro investment to acquire a one-third interest in Chantiers de l’Atlantique, the shipyard that made the cruise ship Queen Mary 2.

ECB President Trichet on Thursday reiterated his standard refrain that euro-zone governments should stick to strict rules stipulating governments keep deficits below 3% of GDP, with limited wiggle room during economic downturns. Asked about the prospects for governments to spur growth more with fiscal stimulus, Mr. Trichet said, “You don’t change the rules.”

Despite the IMF’s advice, Japan’s experience with fiscal stimulus tends to spur caution among other nations. Tokyo poured money into public-works projects to pull Japan’s economy out of a 15-year downturn, but it didn’t accomplish as much as hoped and left the country with little-used bridges and other infrastructure. Now, the Japanese government, again facing likely recession, is rolling out a $51 billion package focused on payouts to families and businesses.

Opponents of fiscal stimulus say the additional money often doesn’t affect the economy quickly enough and winds up adding to long-term debt. In the U.S., only a fraction of consumers spent rebate checks from the first stimulus package this spring immediately.

The new stimulus plan Democrats are considering would instead focus on benefiting cash-strapped local governments and the unemployed. Officials are identifying unfunded public-works projects across the country that they say are essential infrastructure investments that could provide employment if they were jump-started with new spending.

Bob Davis, Jon Hilsenrath, Kelly Evans and Greg Hitt contributed to this article

WASHINGTON — U.S. job losses accelerated the last two months, pushing the unemployment rate to 14-year highs in October, a government report showed, suggesting the economic downturn has taken a turn for the worse toward a deep recession.

The data, which included a small rise in wages, may prompt Federal Reserve officials to consider lowering interest even further in coming weeks to half-century lows.

Nonfarm payrolls, which are calculated by a survey of establishments, tumbled a larger-than-expected 240,000 in October, the U.S. Labor Department said Friday, the 10th-straight decline pushing total job losses for the year to 1.2 million. More than half of this year’s job losses occurred in the past three months alone.

September was revised sharply lower to show a job loss of 284,000, the biggest drop since November 2001. The pullback was broad-based, including manufacturing, construction and most service industries. Excluding a rise in government payrolls, private-sector employment plummeted even further last month.

The unemployment rate, which is calculated using a separate survey of households, soared 0.4 percentage point to 6.5%, the highest since March 1994. Economists think the jobless rate, which was just 5% as recently as April, could approach 7.5% or 8% in coming months.

According to the household survey, employment fell by 297,000 while unemployment rose by 603,000. The labor force grew by over 300,000.

Average hourly earnings increased $0.04, or 0.2%, to $18.21. That was up just 3.5% from a year earlier, suggesting the economic downturn is making it much harder for workers to demand higher wages, further restraining household spending.

“A consumer-led recession is upon us, and it promises to be a serious one,” said MFR Inc. economist Joshua Shapiro.

Wall Street economists had expected a 200,000 decline in payrolls last month and only a 6.3% jobless rate, according to a Dow Jones Newswires survey.

Reflecting the broad-based nature of the employment slump, companies including Whirlpool Corp. (WHR), Chrysler LLC, Goldman Sachs Group Inc. (GS) and Merck & Co. (MRK) have announced layoff plans in the past month.

The jobs report supports Wall Street interest rate-cut expectations. Last week, Fed officials lowered the fed funds rate by 0.5 percentage point to just 1%, its lowest since 2004. In an accompanying statement officials left the door open to further cuts, a view amplified by San Francisco Fed President Janet Yellen who said last week that the Fed “could go a little bit lower” than the current 1% target if needed.

Some economists expect another rate cut at the Fed’s December meeting, which would bring rates down to levels not seen since the 1950s, a forecast that will gain traction in the wake of the employment data. The report also bolsters the case for a second stimulus package. President-elect Barack Obama is to meet Friday with his economic advisers.

“The report highlights the intensifying downside risks for economic activity and suggests that further policy stimulus is necessary,” ING Bank economist James Knightly said in a research note.

Friday’s numbers cap a series of bleak economic reports this week suggesting that after escaping a serious downturn so far, the U.S. economy looks like it’s heading for the type of severe recession that occurred in the early 1980s rather than the relatively mild ones of the early 1990s and 2001.

The Institute for Supply Management’s October manufacturing index, released Monday, fell to its lowest level since the 1982 recession, and automobile sales declined last month to rates not seen since the early 1980s.

According to Friday’s report, hiring last month in goods-producing industries fell 132,000. Within this group, manufacturing firms cut 90,000 jobs, led by losses at carmakers and aerospace firms — the latter reflecting a 57-day strike at Boeing Co. (BA) that ended Monday.

Construction employment was down by 49,000.

In a particularly worrying sign, service-sector employment fell sharply for a second-straight month. Labor-intensive services make up the vast majority of employment and usually cushion downturns. Yet business and professional services companies shed 45,000 jobs — the ninth drop in 10 months — and financial-sector payrolls were down 24,000.

Retail trade cut over 38,000 jobs, with losses concentrated at automobile dealers and department stores. Retail hasn’t added jobs since November 2007, reflecting the pullback in consumer spending. Leisure and hospitality businesses, meanwhile, shed 16,000 jobs.

Temporary employment, which economists consider a bellwether for future job prospects, fell more than 50,000.

Continuing a recent trend, job gains were concentrated in health care, which tends to be more labor intensive and less productive than manufacturing and other services. Health services employment rose 26,000.

The government added 23,000 jobs.

The average workweek was unchanged at 33.6 hours. A separate index of aggregate weekly hours fell 0.3 point to 105.9.

-By Brian Blackstone; Dow Jones Newswires

WASHINGTON — The Federal Reserve on Wednesday slashed interest rates to four-year lows, capping a dramatic policy turn in October as the U.S. confronts a severe financial crisis and almost-certain recession.

Fed officials even left the door open to additional rate cuts to levels not seen in a half-century, putting rates on a once-unthinkable path towards zero.

The Federal Open Market Committee voted unanimously to lower the target federal funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest since between June 2003 and June 2004. That outcome was universally expected by Wall Street economists in a Dow Jones Newswires survey.

The Fed also reduced the discount rate charged for direct loans to banks by 0.5 percentage point to 1.25%, responding to requests from Fed district banks in Boston, New York, Cleveland and San Francisco.

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the FOMC said in a bleak assessment of the economy, while the financial crisis “is likely to exert additional restraint on spending.” Officials also alluded to “weakened” industrial production in recent months and “damping” prospects for U.S. exports.

Though the fed funds rate was 1% as recently as 2004, few if any on Wall Street had thought officials would revisit those levels again.

After all, the 2001 to 2003 easing campaign was seen by some, in hindsight, as an overreaction to the mild 2001 recession and over-hyped deflation fears. Those cuts and the slow pace of tightening thereafter were criticized as the root cause of the ensuing U.S. housing bubble, the collapse of which is at the heart of the current economic storm.

But this time is different. Far from a mild downturn, the U.S. economy is poised to contract sharply. Economists expect third quarter gross domestic product figures, due for release Thursday, to show a 0.5% contraction, at an annual rate. The forecasting firm Macroeconomic Advisers expects an accelerated decline of 2.8% in the current quarter followed by another GDP dip in early 2009.

The Fed “can go below 1%”on fed funds,said Brian Bethune, economist at IHS Global Insight. “They can go to 0.5% and they can even go to zero if they have to,” he added.

“We’re in the eye of the storm so they’ve basically got to use all of the ammunition they have to turn the situation around,” Bethune said.

Meanwhile, the unemployment rate is expected to climb well above 7% in coming months from its current level of 6.1%. And inflation rates, though still quite elevated on an annual basis, should come down quickly in response to falling oil and gasoline prices.

“In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability,” the Fed said. Wednesday’s statement made no reference to inflation risks as previous ones had.

As recently as the FOMC’s last scheduled meeting, on Sept. 16, officials had warned that inflation remained a “significant” concern. But as the credit crunch claimed more victims and showed signs of spilling over to consumer and business spending, Fed officials on Oct. 8 — in an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England — lowered official rates by 0.5 percentage points.

Those global actions as well as Wednesday’s rate cut and “extraordinary liquidity measures’ should promote a return to moderate economic growth, the Fed said, though “downside risks to growth remain.”

Fed officials will monitor the economy and markets and “act as needed” to promote economic growth and price stability, the Fed said.

“The door is open to further easing,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics. He expects another half-percentage-point fed funds reduction at the next FOMC meeting on Dec. 16.

The Fed has also announced a series of programs to help ailing short-term debt markets, particularly by easing corporations” access to loans they need to fund their daily operations. The market for those IOUs, or commercial paper, has suffered as money market funds — the largest group of investors in the market — remain spooked in wake of the collapse of Lehman Brothers. Some money funds had incurred significant losses from defaulted Lehman debt.

Under the Money Market Investment Funding Facility the Fed announced last week, the Fed will provide funding to help money market funds purchase certificates of deposits and commercial paper. And through its Commercial Paper Funding Facility, a complementary program that started Monday, companies such as American Express (AXP) and General Electric (GE) can sell their three-month commercial paper to the Fed.

The Fed has also extended loans to banking organizations to purchase asset-backed commercial paper, started paying interest on banks” required and excess reserve balances and boosted the size of its Term Auction Facility auctions — all in effort to encourage lending.

There are preliminary signs the Fed’s backstop programs are working. A key lending rate, the London interbank offered rate, for instance, was lower Wednesday, extending a streak of consecutive daily declines over the past two weeks.

“The real story regarding the Federal Reserve is its various liquidity operations; the federal funds rate is second fiddle,” said Miller Tabak bond strategist Tony Crescenzi in a research note before the FOMC decision.

Still, the fed funds rate remains a powerful tool given the new global nature of rate cuts. Until recently, the U.S. was largely alone in easing rates given that the root cause of the global downturn has been the bursting of the U.S. housing bubble.

And even if the Fed is entering the final phase of its 13-month fed funds easing cycle, other central banks may just be starting. China’s central bank lowered rates Wednesday for the third time in two months, following an unexpected rate reduction on Monday by the Bank of Korea. Norway’s central bank also lowered rates Wednesday.

The ECB and BOE are expected to cut interest rates further when those central banks meet next month.

Text Of Federal Reserve’s Interest Rate Decision

NEW YORK — The following is the text of the Federal Reserve’s decision on interest rates released Wednesday, Oct. 29:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1%.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4%. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

-By Brian Blackstone and Maya Jackson Randall, Dow Jones Newswires

NEW YORK — U.S. consumer confidence fell to an all-time low in October, after a slight rise a month earlier, and expectations are even bleaker, a report released Tuesday said.

The Conference Board, a private research group, said its index of consumer confidence for October dropped to 38.0, compared with a revised reading of 61.4 in September. Economists surveyed by Dow Jones Newswires expected a reading of 51.5.

The 23.4 point drop in the index was the third largest monthly drop in the series’ history, the board said.

The consumer expectations index for the state of economic activity over the next six months declined to 35.5 in October from 61.5 in September.

“The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence,” said Lynn Franco, director of the Conference Board Consumer Research Center. “Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news doesn’t bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”

The sharp confidence fall is causing economists to cut their estimate for consumer spending in the fourth quarter.

Ian Shepherdson of High Frequency Economics estimated that if the expectation index remains at 35.5, real consumer spending would fall at an annual rate of about 3.5% this quarter, worse than the 3% drop he expects in the third quarter.

But what may help the outlook, he said, is the decline in gasoline prices and the belief that stock prices won’t continue to fall as badly as they have already.

Even so, the damage to household finances has already been done.

“A consumer-led recession is upon us, and it promises to be a serious one,” said Joshua Shapiro of MFR.

The present situation index, a gauge of consumers’ assessment of current economic conditions, fell to 41.9 from 61.1 in the prior month.

Consumers took a very dismal view of the current job market. The percentage who think jobs are hard to get rose to 37.2% in October from 32.2% in September. At the start of 2008, only 20.6% thought jobs were hard to get.

The report was released as the Federal Reserve started a two-day meeting to set monetary policy. The sharp fall in confidence bolsters the view that the Fed will cut the fed funds rate by 50 basis points, to 1%.

-By Riva Froymovich, Dow Jones Newswires