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THE DAY AHEAD: Another rate cut is a bad idea

COMMENTARY--Watching Wall Street react to the latest economic reports conjures up visions of thousands of tennis spectators breathlessly following a never-ending series of volleys that bring horror and then relief with each passing shot.

But unlike the matches held at Wimbledon or the U.S. Open, this crowd doesn't get the satisfaction of an immediate and certain outcome.

They have to wait until a group of suits gathers every couple of months to review what they've seen and then make some determination if and how much interest rates are to be adjusted to react to the onslaught of economic data.

These suits, better known as the Federal Reserve Board, focus on unemployment data, housing starts, wages and consumer spending to help them ascertain the best course of action for the nation's monetary policy.

It's an imperfect science. Raising interest rates just when the economy is beginning to falter—a scenario that played an important role in ravishing stock prices in the past 15 months—can do needless harm. Cutting rates when the economy is booming, or about to boom, can lead to the type of reckless spending and investing that got stock prices to their ridiculous levels in late 1999 and early 2000.

After chopping two full percentage points off short-term interest rates in the first quarter, the Federal Reserve Board's Open Market Committee will meet again next week to determine whether or not to go even lower.

There's growing sentiment on Wall Street that the Fed will cut rates by another half point next week, bringing the short-term rate down to a paltry 4 percent.

Those lobbying for the cut point to last week's unemployment figures, which showed the U.S. jobless rate shot up to 4.5 percent in April, the highest level since October 1998. Analysts were expecting the unemployment rate to come in at only 4.4 percent.

Considering the layoffs announced throughout the technology industry in the past three months, it wouldn't be much of a surprise if unemployment shot up even higher in the next few months.

This news hardly inspires any confidence on Wall Street because the prospects of raising unemployment and the subsequent decline in consumer spending threatens to push the U.S. economy deeper into a recession.

"You can't give a happy story in this one, on any front,'' said Sean Callow, currency economist at in New York.

However, the economic reports keep sending mixed messages to the Fed.

On April 25, the Commerce Department chimed in with news that orders for expensive manufactured items surged 3 percent in March to $205.12 billion, the largest gain since November 2000.

On that same day, it was reported that new homes sales rose to a record level in March, showing that while the economy has slowed, people are still spending a lot of money.

Rate-cut proponents weren't enthused by this news, figuring that any signs of healthy economic growth would lead Fed Chairman Alan Greenspan and the rest of the Board of Governors to hold up on more rate cuts for a while.

"If you're looking for argument that the consumer isn't falling out of bed, just look at housing sales, which have done extraordinary well," Ed Cimilluca, who helps oversee $250 million for ING Furman Selz, told Reuters. "But in terms of capital spending, a lot of tech companies have themselves a problem."

Over the weekend, monetary policy experts from around the world weighed in on the U.S. economy, suggesting that worst was already behind us.

"The general expectation is that we will see the United States economy grow and the growth will pick up in the latter part of the year,'' Bank of England Governor Eddie George told reporters during a meeting of the Bank for International Settlements in Switzerland.

George said the U.S. economy remained a key for the rest of the world's major economies, including the euro zone, where the expected rate of growth was now "a bit less than was anticipated perhaps six months ago, but not massively less."

He and other economists added that the so-called Old Economy sectors, meaning basically anything non-tech related, are showing signs of recovery.

And the issues plaguing the vast majority of technology companies, primarily excess inventories and shrinking profit margins, should be resolved by the fourth quarter.

"I think there's evidence that in some sectors of the U.S. economy the inventory adjustment which needed to take place has progressed quite strongly, and may indeed be at the turning point of the inventory cycle," George said.

Even though it's unpopular, the Fed would be wise to leave interest rates unchanged until some of the tech bellwethers give the Street an idea of just how much orders have improved in the second quarter.

"The question is whether the economy will come out worse than people expected," James Oberweis, a portfolio manager at Oberweis Asset Management, told Reuters. "But the decline we saw earlier this year was pretty serious, one of worse periods ever. Now I think we have taken the valuations down to where a lot of that risk is built into the prices of stock."

The Nasdaq composite is up more than 26 percent in the past month.

The last thing Wall Street needs is another artificial catalyst.