19 March 2001, 17:21 FOCUS Fed rate cut of 75 basis pts gaining support; majority still see 50 pts
---- by CHRISTOPHER ANSTEY ----
WASHINGTON (AFX) - A growing number of analysts now expect a
three-quarter percentage point reduction in interest rates at the
Federal Open Market Committee (FOMC) meeting tomorrow, although it is
still a minority.
"It has all come down to a debate about 50 or 75 basis points. It's
a pretty close call, but there's no doubt the Fed will ease," said
Richard Rippe, chief economist at Prudential Securities Inc.
"Up to now I've been on the 50 side, with 75 being possible. I
still think that's where I am," he added.
Sharp declines in U.S. stock markets in recent days, combined with
economic data showing no end to the recession in the manufacturing
sector, and no threat of inflation pressures, have turned some analysts
to forecast the FOMC will cut the key federal funds rate to 4.75 pct
from its current 5.5 pct.
Analysts said surveys of primary securities dealers show this
forecast is still a minority view, however.
A larger rate cut will serve "as a shock therapy" to combat a
"pervasive sense" of gloom about the stock market and the economy's
prospects, said Neill Soss, chief U.S. economist at CS First Boston,
who forecasts the FOMC will opt for the larger cut.
Carol Stone, deputy chief economist at Nomura Securities
International, said she now forecasts a 75 basis point cut, due to the
fall in the stock market itself, as well as the growing number of poor
earnings reports, and warnings on expected earnings.
"There are mounting signs of weakness," in the corporate earnings
outlook, she said.
Rising concerns about the contagion effect of pronounced economic
weakness and political uncertainty in Japan are also a factor, Stone
said.
"I think the very recent reports about the situation in Japan will
probably be part of the Fed's discussion," she concluded.
The stock market could respond adversely to just a half-point ease,
some analysts said.
"Fed funds futures point to an 80 pct plus probability of a 75
basis point rate cut, and hence a 50 basis point cut would be a
disappointment," Bear Stearns economists said, who now see a larger
cut, although "it is a close call."
Merrill Lynch, Stone & McCarthy Research, HSBC Securities, and CS
First Boston economists have also changed their forecast to a
three-quarter point cut.
But most economists still see a half-percentage point reduction,
which Stanley Shipley, senior economist at Merrill Lynch, said "is
still aggressive."
The Fed has not cut the federal funds rate by over 50 basis points
since Aug 1982.
Goldman Sachs economists, predicting a 50 basis point cut, said "a
larger cut is possible; but it is unlikely, as the real economic data
have been mixed, and Fed officials have been talking relatively
optimistically."
While there are continuing declines in industrial production, and
rises in unwanted inventories and layoff announcements, there are still
areas of strength in the economy.
The University of Michigan consumer sentiment index showed an
unexpected rise in March, the economy continued to generate moderate
non-farm payroll growth last month, and housing sector indicators
remain healthy, economists noted.
Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter,
said: "I have decided not to switch my forecast (of a 50 basis point
cut)...the Fed hasn't seen the weakness in the economy that would
justify a bigger easing."
Berner noted the Fed eased interest rates by a full percentage
point in January, which was the biggest single-month easing in almost
20 years.
Retail sales did show a decline last month, but this came after a
large revised gain in January. Consumer spending is still expected to
grow during the first quarter, helping to counteract weak business
investment spending, said Tim O'Neill, chief economist at Bank of
Montreal.
The question for the Fed "is how much weight to place on the
eroding areas, and how much to put on the stable areas," Rippe said.
Fed officials have also repeatedly said they do not set monetary
policy to target the stock market, analysts said.
"The problem Greenspan would have doing 75 is that all the claims
that he's not for bailing out the stock market would be for naught,"
O'Neill said.
Berner agreed: "the Fed does not want to be seen as responding to
the stock market."
If the stock market were to begin having a significant, measurable
impact on consumer spending, it would be more of a concern, analysts
said.
But the consumption side of the economy "is still in reasonably
good shape" now, O'Neill said.
Robert McGee, chief economist at Tokai Bank in New York, said "I
think they will probably cut by 50, and wait to see how things go from
there."
"If there were some kind of (market) crisis situation, or if the
economic data turn much worse, then they could respond to that as they
did in January (with an inter-meeting move)," he said.
Several analysts contacted by AFX News raised this possibility,
noting the next FOMC meeting after tomorrow will not be until May 15,
leaving almost two full months between meetings.
O'Neill said March retail sales and non-farm payrolls "will be
absolutely critical" in the interim period.
If payrolls contract, or retail sales are "really weak," the Fed
could decide to take early action next month, he said, although he did
not anticipate such an outcome.
The FOMC will likely "make it very clear that they will ease again"
in its statement announcing the results of Tuesday's meeting, O'Neill
concluded.
One analyst told AFX News said the Fed could only announce a
quarter-point cut tomorrow.
Ken Goldstein, economist at the Conference Board, said "I'm not
sure we're going to get 50."
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