By Edward Kean Washington, June 15 (BridgeNews) - Merrill Lynch economists said Friday they now expect the Federal Reserve to cut its short-term interest rate target by another half percentage point at its June 26-27 monetary policy meeting, up from the firm's earlier forecast of a quarter-point rate cut.
Merrill Lynch senior economist Gerald Cohen said "continued signs of weakness" in the U.S. economy prompted Merrill to change its forecast of how much the Fed will cut rates at its policy meeting later this month. "The data will push them to do more, not less," he said.
Cohen cited the weakness in the Fed's "beige book" report on U.S. economic activity issued Wednesday, the ongoing decline in industrial production and the high level of new unemployment insurance claims. Also, the absence of inflationary pressures gives the Fed room to ease more, he said. In a written commentary, Merrill Lynch chief economist Bruce Steinberg said it is possible the Fed will cut rates again even after its June 26-27 meeting, depending on how the economy performs in the next two months. By Labor Day, there should be tentative signs of a stronger economy as tax rebates should help spur activity, Steinberg said.
Financial markets had been anticipating that the Fed would lower rates by a quarter point at the June 26-27 meeting. The Fed has cut rates five times this year by a combined 2 1/2 percentage points to stimulate a sluggish economy. However, after the release of the latest economic data Friday, some economists said the odds of a more aggressive half-point Fed rate cut had risen. That data included a sharper-than-expected 0.8% decline in May industrial production and a smaller-than-expected 0.1% rise in the May "core" consumer price index, which excludes food and energy prices.
Nevertheless, prices for the July fed futures contract imply traders still see less than a 50% chance for a half-point rate cut at the June meeting.