--Analysts see 57% odds of 25-bp cut at June 26-27 meet
--Fed funds target rate still seen at 3.50% by end-Aug
By Shihoko Goto Washington, June 19 (BridgeNews) - With few signs of vigor in the U.S. economy despite the wave of interest rate cuts since the beginning of the year, economists have raised their expectations of yet another 50-basis-point rate cut at the Federal Reserve's upcoming policy meeting next week. Still, more than half of the economists surveyed anticipate a 25-basis-point cut instead.
The latest BridgeNews Fed Poll taken Tuesday found analysts projecting the odds of a half-percentage point cut at the Federal Open Market Committee's June 26-27 meeting at 42%, a considerable increase from the 26% in a poll taken at the beginning of this month. Meanwhile, the 21 economists surveyed pegged the odds of a quarter-percentage point cut at 57% compared with the 65% projected on June 1. If the Fed does slash rates again by another 50 basis points, the key federal funds target rate will have been reduced by a total of 300 basis points since the beginning of the year. It would certainly mark the swiftest easing period under Fed chairman Alan Greenspan's 14-year rule.
Meanwhile, all Fed watchers agreed the central bank would continue to argue that economic weakness remains the greater risk, in spite of some concern about inflationary pressure.
Looking beyond the meeting next week, analysts continue to expect the fed funds rate to stand at 3.50% both at the end of August and at the end of the year. After June, the Fed is slated to four more meetings this year, with the next one on Aug. 21. The June meeting will be the sixth this year.
Although Fed officials had chorused that an economic upturn was likely by the second half of this year, some have changed their tune slightly over the past few days. Earlier this week, Richmond Federal Reserve Bank President Alfred Broaddus told business leaders in Virginia that there are still "considerable downside risks" in economic outlook, adding that he did not know whether the economy was bottoming out yet or not.
Boston Federal Reserve Bank President Cathy Minehan echoed Broaddus' view, telling researchers in Boston that it was difficult to find any sign of a turnaround at this stage. "Both have suggested that the timeline for recovery has been pushed back until fairly late this year," Kenneth Kim at Stone & McCarthy Research Associates, said.
Analysts have pointed in particular to the continued weakness in manufacturing, and the real as well as psychological blows of a downturn in the job market. Still, growth prospects are likely to improve by late summer or early autumn, as the rate cuts from the beginning of the year and tax rebates kick in, David Resler at Nomura Securities in New York said.
Moreover, the Fed is likely to take a breather from its aggressive round of easing to measure the full impact of the rate cuts thus far, First Tennessee Capital Market's Chris Low said. HSBC economist Ian Morris maintained the Fed is likely to opt for a more modest one-quarter point now because, "they want to save their bullets." The Fed might ease again in an inter-meeting move in July if the economic statistics remain weak.