28 June 2001, 09:37  FOCUS FOMC slows pace of easing, shows no hint of anxiety over economy

---- by GREG ROBB ----
WASHINGTON (AFX) - The Federal Open Market Committee's "bland" statement accompanying their decision to cut short-term interest rates by 25 basis points to 3.75 pct shows the central bank is confident with the amount of easing in the pipeline will turn the economy around, analysts said.
"This was about as bland a statement that they have ever made and there is no hint in here of any anxiety," over economic conditions, said Rus Sheldon, economist with Nesbitt Burns in Toronto.
Analysts complained that the FOMC statement gave no reason why the Fed shifted to 25 basis point rate cuts from the previous five 50 basis point reductions.
"The most striking feature of the Fed's statement...was the total lack of explanation as to why this cut was less aggressive than the prior five," said David Orr, chief economist at First Union.
"The lack of explanation leads us to believe this decision was a compromise reached between those on the FOMC who wanted a 50 basis point cut and those who wanted either 25 bp or nothing," Orr said. Although the FOMC maintained a bias towards easing, their statement left out the key phrase that Fed officials would be "monitoring the evolving situation." Analysts have come to believe that such language is a signal for a possible intermeeting move.
"It would appear that barring wose than expected economic data, the Fed does not intend to act again until (the) Aug 21 (meeting)," said Orr.
"There was a very clear signal that the pace of easing has now slowed - they are going to pursue a more calibrated response to the economy, and they are hoping that past easing steps will soon show up," Sheldon said.
Jim Glassman, senior economist at JP Morgan Chase, said the FOMC's action shows "growing confidence" that the lagged effects of monetary policy combined with the tax rebates that will soon be mailed out to millions of Americans will turn the economy around in the second half of the year.
Joel Prakken, chairman of Macroeconomic Advisors in St. Louis, agreed saying the FOMC was "signalling an end to the aggressive nature of the easing as they wait to look for lagged effects of the previous easing to take hold."
The FOMC emphasized just how much it has cut rates this year by adding a sentence to their statement that "today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 275 basis points."
Mike Moran, chief economist at Daiwa Securities American Inc, said this sentence was "a less-than-subtle signal that policy has been aggressive so far this year."
"If you measure it in terms of the percentage declines in the funds rate, it is one of the most aggressive easings ever," Prakken said. "While it had taken awhile for that to develop much traction, there are some signs now that the economy is going to start righting itself in the second half of the year," he added.
Prakken and many other analysts believe that this will be the last rate cut of the current easing cycle.
"I think this is probably the last rate cut. I think people will be suprised how quickly things improve in the second half," said Tim McGee, chief economist at Tokai Bank Ltd.
However, other analysts are concerned that the economy will remain weaker than expected.
Orr of First Union said the Oct Fed funds futures contract indicated a 56 pct expectation of a 25 bp cut in the funds rate to 3.5 pct on Aug 21.
Shelton said he thinks the Fed funds rate will have to drop as low as 3.0 pct.
"We think the capital spending decline is an extremely powerful force that has a lot left to play out," Shelton said.
Ian Morris, chief economist at HSBC Securities USA, agreed: "Further bad news on the economy will be met by further cuts, although most likely in 25 basis point steps." He forecast that GDP growth would decline in the second half of the year.
Economists at Bear Stearns said that their "reading of economic conditions in the upcoming quarter lead us to believe that the Fed will cuts rates again on August 21 and October 2, putting the funds rate at 3.25 percent (which we believe will be the low for the funds rate)."

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