Sept. 7 (Bloomberg) -- Treasury Secretary Henry Paulson said the unexpected decline in August payrolls that sent stocks from Red Square to Wall Street reeling is ``not the kind of number I'd like to see.''

The Treasury chief agreed with former Federal Reserve Chairman Alan Greenspan, who said the current market resembled the ``fear'' among investors during the upheavals of 1998 and 1987. Paulson said in an interview in Washington that ``it takes a while for confidence to return'' when investors are forced to ``reprice'' assets.

The loss of jobs stoked calls from economists and investors for the Federal Reserve to cut interest rates to head off a recession. The report was the clearest sign so far that the credit-market rout of the past month and the two-year slump in housing threaten to stall economic growth.

Employers in August cut 4,000 workers from payrolls, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said today in Washington. The unemployment rate held at 4.6 percent as almost 600,000 people left the workforce.

``Data does not always move in a straight line, so occasionally you will find some surprises,'' Paulson said. ``The economy will continue to grow in the second half of the year,'' he also predicted.

`Confidence' in Fed

Paulson, who had a regular breakfast meeting with Fed Chairman Ben S. Bernanke today, said he had ``great confidence'' in the central bank.

Fed policy makers next meet on Sept. 18. Economists predict they will lower their target rate for overnight loans between banks by at least a quarter point from 5.25 percent.

The strain in capital markets requires ``a great deal of vigilance'' and administration officials are in touch with market participants, Paulson said.

``This will take some time. There will be news that is not always good news,'' he added. ``There will be some organizations that will not make it. There will be some losses. But I feel quite strongly that we have a resilient economy.''

Greenspan told an audience of economists yesterday that the recent market turmoil has had ``identical'' patterns of behavior to the financial crises of 1998 and 1987. He has been talking to audiences around the world and writing a book, ``The Age of Turbulence,'' since retiring last year.

`Far More Potent'

``Fear'' that's driving the market is ``far more potent'' than the euphoria that fuels expansion and creates bubbles, Greenspan said yesterday, according to his spokeswoman, Lisa Panasiti. ``These bubbles cannot be defused until the fever breaks,'' he said.

Greenspan cut rates three times in 1998 after slides in emerging-market currencies led to a Russian debt default and the collapse of Long Term Capital Management LP. In 1987, the Fed pumped liquidity into the banking system after the Dow Jones Industrial Average slid 23 percent in a day.

Paulson said the slump in housing, which spurred the rout in credit markets as securities backed by subprime mortgages lost value, will ``extract a penalty'' on economic growth. Still, he noted that overseas demand is helping U.S. exports, wages are ``going up'' and inflation is ``contained.''

Yields on inflation-protected Treasuries declined less than Treasury yields as investors cut their expectations for how much rising consumer prices will add to their returns.

Inflation Expectations

The inflation-protected 10-year yield is lower than the 10- year Treasury yield by 2.17 percentage points, according to Barclays Capital Inc. The differential, reflecting expected inflation over the life of the notes, hasn't been smaller since October 2003, according to data compiled by Bloomberg.

Edward Lazear, chairman of the White House Council of Economic Advisers, noted that today's job report still showed a gain in jobs outside the government. ``If you look at the overall picture, we are still comfortable with what we are seeing,'' Lazear said in an interview with CNBC television.

Bernanke and his team have used a number of tools, such as lowering the cost of direct Fed loans to banks, to try to ease liquidity and restore confidence in markets. The central bank injected $31.25 billion into the banking system yesterday, the most in almost a month, amid continued stress in markets.

Fannie, Freddie

Paulson, who has resisted Congressional pressure to let Fannie Mae and Freddie Mac buy home loans beyond their regulated portfolio limits, said the administration was working with the mortgage buyers to help homeowners.

``The way to help is to say `are there ways for them to provide loans that will be relevant to the subprime sector?''' Paulson said. ``These loans are less profitable for them. There's more risk. If we are going to encourage them to get into that area, we are going to need a strong, independent regulator that is at least equal with what the private sector has.''

The yield on the benchmark two-year note slid below 4 percent after the employment report, more than 1.25 percentage point below the Fed's target, indicating traders anticipate a series of rate cuts. The Standard & Poor's 500 index fell 1.2 percent to 1,460.41 at 12:38 p.m.

To contact the reporters on this story: Peter Cook in Washington at pcook6@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: September 7, 2007 13:07 EDT