DJ-CNBC Survey: Fed Intermeeting Rate Cut Odds At 40%
Do They Have A Derivative That You Can Use To Speculate On This? <gg>
NEW YORK (Dow Jones)--Though heightened expectations of a second intermeeting rate cut in less than two months boosted fixed income and equity markets Monday, Fed watchers still peg the odds at less than 50-50.
The median prediction of 10 economists polled by Dow Jones Newswires and CNBC is a two-in-five chance of a rate reduction by the end of the week. Chances range from a low of 15% by Societe Generale to a high probability of 80% by Bear Stearns.
The latter forecast, which was upped from 60% Monday, helped fuel rallies in equities and bonds. The 10-year Treasury note rose 16/32 in price Monday, dropping the yield to 5.05%. And after languishing much of the day, the Dow Jones Industrial Average rose 200 points, or 1.9%. The Nasdaq Index rose 46 points, or 2%.
Bear Stearns's chief economist, Wayne Angell, is a former Fed governor. His forecast Friday of a 60% chance of a cut in rates this week helped spark a stock market rally in the last few hours of an otherwise dismal trading week.
And this week's data could be on Angell's side. Consumer confidence and manufacturing reports - both key signposts for the Fed - are expected to show further weakness. The Conference Board's consumer confidence index, due Tuesday, is expected to shed seven points to 107, making for a 35-point drop since September.
The National Association of Purchasing Management index, due Tuesday, is expected to rise just 0.8 point to 42 in February, which is below the threshold between expansion and contraction, not only in manufacturing, but in the economy as a whole.
Even economists who see the odds of a rate cut this week as minimal agree that NAPM and confidence would be the likeliest triggers, along with stock prices. They also agree that with the next scheduled Fed meeting just three weeks away, this week would be the likeliest for a between-meeting move.
"I think that if (the Fed is) going to go, it will be this week," said Ethan Harris, an economist at Lehman Brothers in New York. "We are at the midpoint between the (policy) meetings" and the nature of the data on deck gives the central bank the latitude to take action should it desire, he said. Harris is currently citing a 40% chance of the Fed moving this week.
McTeer Remarks Suggest Patience
Nevertheless, the odds are still against another intermeeting rate reduction, despite expectations of more weak economic reports. Some contend that other economic data on consumer spending have stayed firm despite the confidence drop.
And though the recent decline in consumer confidence and manufacturing has been dramatic, some pointed out that a degree of softening was desired. After all, the Fed worried as late as November that the risks were weighted toward inflation rather than economic weakness.
If it were to cut rates between meetings a second time in less than two months, the Fed could also send a dispiriting message to Americans that the economy is even weaker than they think, some economists said.
Given the importance of consumers to the overall economy, "it makes it even more difficult to understand why (Fed Chairman) Alan Greenspan is inviting them to panic," said Barry Bosworth, economist at The Brookings Institution, a Washington, D.C. think tank.
Remarks Monday by Dallas Fed Robert McTeer appear to support the view that the Fed will wait until March 20 to move on rates.
In a transcript of an interview with the Nightly Business Report to be aired Monday, McTeer was asked if a weak consumer confidence report Tuesday could be a reason for a rate cut before March 20.
He responded, "I wouldn't think that one number - or even a couple of numbers - would be sufficient to do that."
McTeer added that "I think there is a preference to make monetary policy meetings at regularly scheduled meetings," unless the need for immediate action "is obvious and great."
02/26/2001
Dow Jones News Services
(Copyright © 2001 Dow Jones & Company, Inc.)
-By Brian Blackstone; Dow Jones Newswires; 201-938-4156; brian.blackstone@dowjones.com |
