Economists at TD Bank are calling for U.S. interest rates to fall by another 100 basis points by the end of the summer.

TD notes that market opinion over the health of the United States economy has been gyrating from negative to positive and back again in with each data release in recent weeks. “This roller-coaster ride in sentiment reflects the mixed messages being sent by major economic reports. Although current measures of credit and liquidity are unlikely to be setting off alarm bells at the Federal Reserve, they do suggest that a further easing in monetary policy is warranted — consistent with our view that the fed funds target rate will be lowered by 100 basis points to 3.5 per cent by the end of the summer.”

Although TD acknowledges that the Fed has been aggressive in cutting rates by 200 bps already this year, it notes that real rates are still far above the rates that were necessary to pull the U.S. out of recession in the early 90’s. “Since monetary policy shifted into stimulative territory only with the rate cut in April, there is certainly scope for the Fed to reduce short-term rates further.”

“There is nothing in the data to suggest that the Fed is falling behind the curve and needs to ease between policy meetings again. However, with the exception of the money supply data, all of the financial market indicators reveal that the current stance of monetary policy is only slightly stimulative,” says TD.

It says that while the financial indicators are not dire, the back-to-back monthly declines in non-farm payrolls are worrying. “The key to the outlook for the U.S. economy is the prospect for consumer spending, which constitutes more than 60% of GDP. Despite all the attention to the possible negative wealth effects from the stock market correction, far more important will be any negative income effects from weaker job creation. As a result, the recent job losses and the low level of consumer confidence build the case for the Fed to take out some additional insurance against a recession.”

As a result, it calls for another 100 bps of easing, including 50 bps at the May 15 FOMC meeting, and quarter point reductions in June and August. “Allowing for a lag of six to nine months between changes in interest rates and economic activity, the Fed rate cuts since the start of the year should set the stage for an upswing in economic growth in the fourth quarter of 2001.”