Investors Question The Fed's Outlook

But pessimists dwelt yesterday on more recent, and grimmer, numbers. Construction spending fell 1 percent in October, for a second consecutive monthly drop, the Census Bureau said. The 1.9 percent drop in homebuilding was the seventh consecutive monthly decline and was widely expected. More troubling was the lack of growth in non-residential construction, which was flat in October and September after more than a year of growth.

"Strength in non-residential construction was supposed to offset the recession in housing. Now that assumption is in question," said Nariman Behravesh, chief economist at Global Insight.

Many economists had also expected factories to continue cranking out enough goods to more than make up for falling production of lumber, nails, roof tiles and other residential building materials. But the Institute for Supply Management said yesterday that its index of total manufacturing activity fell to 49.5 last month from 51.2. A number at 50 or above signifies expansion. It was the first time since April 2003 the index had dropped below 50.

Oil prices also rose this week, with light sweet crude closing at $63.55 a barrel yesterday on the New York Mercantile Exchange.

Stock prices slid yesterday, leaving all the major indexes down for the day. The Dow Jones industrial average lost 27.80 points, or 0.2 percent, to close at 12,194.13.

To some observers, the recent softness appeared uncomfortably reminiscent of the economy's sudden sputtering in late 2000, which gave way to a recession the next year. As late as their meeting in November 2000, Fed policymakers believed the technology sector's sharp downturn would not seriously weaken the broader economy, which still had a very low unemployment rate, 3.9 percent. They remained more worried about inflation and indicated they were more likely to raise than reduce interest rates.

Seven weeks later, on Jan. 3, 2001, the Fed cut its benchmark overnight interest rate to 6 percent from 6.5 percent, expressing concern about the economy's strength. The recession began in March and lasted through November.

The experience in late 2000 demonstrated how quickly the economic outlook can turn, said Laurence H. Meyer, who was a Fed board member then.

Meyer, now vice chairman of Macroeconomic Advisers, said his firm was lowering its forecasts for economic growth this year and next but doesn't foresee the current slowdown snowballing into a recession.

His optimism partly reflects another lesson he draws from the 2000 episode: Fed policy "can equally change quickly."

Bernanke's latest comments do not mean the Fed won't cut interest rates quickly if the economy deteriorates, Meyer said. "Obviously, the beauty of monetary policy is you can turn on a dime."