NEW YORK, Oct 5: Wall Street firms are increasingly split over whether the Federal Reserve will cut interest rates again before Christmas, with more economists now citing worries about a lack of economic momentum.

A Reuters survey of Wall Street firms taken on Friday after the September employment report was released found economists are divided over whether the Fed will give another boost to the economy.

Ten of the 20 primary bond dealers surveyed say the economy needs more stimulus, in the form of another rate cut. But the other 10 still expect the recovery will stagger forward enough to keep the Fed on hold.

The September payrolls report was less gloomy than many in the market feared, which doused speculation that the Fed could lower borrowing costs even before its next meeting on Nov. 6.

But others believe the numbers will deteriorate from here.

The September payrolls report showed a drop of 43,000 jobs, but that news was more than offset by a hefty upward revision to August to show a solid gain of 107,000 jobs.

There was a lot of fear going into this report that it could have been a lot worse, said ABN AMRO chief US economist Steve Ricchiutto.

The important thing is the economy doesn’t show any real signs of undue stress despite everything else that’s going on. There’s not enough to get the Fed off the marker, he said.

But economists who were already expecting a rate cut were not swayed by the payrolls report. We still think the Fed will cut, said Deutsche Bank chief US economist Peter Hooper.

The futures market fell after the payrolls report, reducing the odds on a rate cut before the next Fed meeting on Nov. 6 to close to zero. The December fed funds contract is still priced for a rate reduction by the end of the year.

A series of senior Fed officials this week said that the low 1.75 per cent federal funds rate was “accommodative”, or supporting growth, and that the uneven recovery was continuing.

But they also spent more time discussing the risks to the economic outlook than previously.

At the top of that list are the sliding stockmarket, which has fallen close to 30 per cent of this summer, and a potential war with Iraq which has become one more reason for already-cautious businesses to put off new spending.

There are downside risks in the outlook, and they need to be monitored especially closely, Richmond Fed President Alfred Broaddus said on Wednesday.

Others, including Atlanta Fed President Jack Guynn, counseled patience.

And in an interview with Reuters on Friday, the director of research at the Philadelphia Fed said the recovery was slow but there are still factors supporting economic growth.

There are some positives out there, I think it’s just going to take time, for the recovery to take hold, Philadelphia Fed research director Loretta Mester said.

The Fed itself has been divided over how to respond to the uneven recovery from last year’s recession, with two officials voting for a rate cut at the Sept. 24 policy meeting.

Though consumer spending has held up, businesses have hunkered down, delaying new hiring and investment. Nevertheless, economic growth this year has averaged around 3 per cent not too shabby, particularly when compared with anemic growth in elsewhere like Europe and Japan.

And the US unemployment rate edged down again in September to 5.6 per cent, contrary to analyst expectations. There were other bright spots in the report, including an increase in the workweek, showing that firms were squeezing their existing workers before hiring new ones.

We’re not there yet, but this report is telling me despite all the pessimism, despite all the shocks that we have faced, there is a normal turnaround taking place in the labor market, said JP Morgan Chase senior economist James Glassman.

The Fed won’t cut rates unless they see the economy take a new leg down. They know these things take time.

The different directions taken by unemployment rate and payrolls, which are based on two separate surveys, caused some consternation and left the picture muddied enough for analysts to leave their interest rate expectations unchanged.—Reuters