Fed likely to prefer lending over interest-rate cuts

But even after the Labor Department said the U.S. economy shed 20,000 jobs last month fewer than expected stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.

The report was a relief to Wall Street, which expected payrolls to fall by 70,000 jobs. The unemployment rate fell to 5 percent from 5.1 percent. It was the fourth straight month of job losses, but the data signaled the economy might be resisting recession.

Dan North, chief economist at Euler Hermes, said he expects the Fed to cut rates one more time next month, by 0.25 percentage points, and then stop. The Fed's statement accompanying its decision this week carried a more hawkish tone on inflation suggesting Chairman Ben Bernanke is more worried about swelling prices and thus less inclined to slash rates, he said.

Rather than sustaining banks with badly needed loans, North thinks the Fed is "polluting the world with dollars," meaning making money so easy to obtain that the dollar is losing value.

The market is "awash in liquidity," North said. Plenty of companies have plenty of cash to lend or spend, North said.

"The Fed is trying a multitude of things," he said. "They're looking for ways other than lowering interest rates, but what's happening is they're just pumping liquidity into the system and it's not necessarily going to make the banks want to lend more."

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AP Business Writer Tim Paradis in New York contributed to this report.

(This version CORRECTS SUBS 2nd graf to correct 4.75 percent to 5.25 percent.)