12 December 2001, 08:53 FOCUS Cautious FOMC statement leaves door open for one more rate cut
---- by Greg Robb ----
WASHINGTON (AFX) - The FOMC was cautiously upbeat about the
prospects for the US economy, but still left the door open for one more
rate cut at their next meeting on Jan 30, Wall Street analysts said.
In a statement at the conclusion of its meeting, the FOMC stated
that "weakness in demand shows signs of abating, but those signs are
preliminary and tentative." The FOMC also said that underlying
inflation is likely to edge lower from already low levels.
Taken together, "what they are telling you is that they are not
finished yet," said James Glassman, senior vice president and senior
domestic economist at JP Morgan Securities Inc.
At their meeting, the FOMC engineered its 11th rate cut in the past
year, reducing the Fed funds target rate by 25 basis points to 1.75 pct
and the more symbolic discount rate by 25 basis points to 1.25 pct.
The FOMC maintained its easing bias, saying that "risks are
weighted mainly toward conditions that may generate economic weakness."
Most analysts expect another 25-basis point easing in January.
Maury Harris, economist at UBS Warburg, noted that historically,
the FOMC keeps easing until the unemployment rate stops rising. He
forecast that the unemployment rate would peak at 6.2 pct before the
end of the first quarter.
However, some analysts differed with the consensus.
Neil Soss, economist at Credit Suisse/First Boston said the FOMC
statement contained mostly "green-light language," and that the FOMC
would further cut rates in January and March.
On the other hand, Lynn Reaser, chief economist at Bank of America
Capital Markets, said the FOMC has now completed its easing for this
economic cycle.
"We believe that this is the last of the interest rate cuts
required. The economy appears to be in the process of bottoming out,"
Reaser said.
Mark Vitner, vice president and economist at First Union, said the
Fed statement was meant to encourage both the stock and bond markets.
On the one hand, the Fed pointed out that inflation is headed lower
to reassure bond investors, "but they also hint that the economy is
bottoming out, which should give stocks a boost, Vitner said.
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