Friday May 11, 1:20 pm Eastern Time
Wall St. Still Expects More Fed Rate Cuts
By Marjorie Olster
NEW YORK (Reuters) - New signs of healthy consumer spending did not shake Wall Street
expectations that the Federal Reserve will reduce interest rates by another half percentage point next
week to inoculate the economy against recession, a new Reuters poll on Friday showed.
Despite some good news on Friday on retail
sales in April and consumer sentiment in May,
the shedding of nearly a quarter million jobs from U.S. payrolls last month
convinced economists the Fed will slash rates once again at its meeting on
Tuesday.
All but one of the 25 primary dealers of U.S. government securities -- firms that
trade directly with the Fed in money markets -- predict the central bank will cut the
overnight bank lending or federal funds rate to 4.0 percent from 4.5 percent.
``The Fed has seen a lot of encouraging signs in the jobless claims and today's
retail sales but there still must be some nervousness about the layoffs issues,'' said
Steve Gallagher, economist at SG Cowen Securities. Cowen forecasts a half-point
rate cut next week but no cuts after that this year.
Most dealers expect next week's cut to be followed by another one in June, but do not anticipate much more action after that for the
year.
After years of booming growth the U.S. economy slowed significantly at the end of last year, prompting the Fed to embark on a rate
cutting campaign to stave off a recession.
In four half-point reductions since January, the policy-setting Federal Open Market Committee (FOMC) has lowered the benchmark
lending rate by 2.0 percentage points, a very aggressive course of easing for the normally conservative Fed.
MIXED SIGNALS, FED FOCUS ON JOBS
The poll was conducted shortly after the Commerce Department reported that sales by U.S. retailers rebounded much more strongly
than expected in April, rising 0.8 percent after two months of declines.
A separate report on Friday showed a closely-watched consumer sentiment index compiled by the University of Michigan rose to 92.6
in May from 88.4 in April, much higher than expected.
A day earlier, another encouraging government release showed the weekly numbers of Americans applying for first-time unemployment
benefits fell sharply to a level not seen in more than a month.
The most convincing reason for the Fed to slash rates once again next week, economists said, was the shocking 223,000 subtraction of
workers from non-farm payrolls in April. The unexpected plunge sent the unemployment rate up to 4.5 percent, the highest since
October, 1998.
``The drumbeat of layoffs seems to be continuing pretty loudly, so we are looking for further signs of softness on employment front and
that will be the driver,'' said Peter Buchanan, an economist at CIBC World Markets.
Jim O'Sullivan, economist at UBS Warburg in Stamford, Conn., said a half-point cut was a ``done deal'' because of the worsening job
situation. ``The employment report was more than weak enough,'' he said.
New inflation data did not seem to pose any obstacles to further rate cuts. The Producer Price Index, which measures wholesale price
inflation, rose a modest 0.3 percent in April and 0.2 percent excluding food and energy.
The poll results were little changed from the previous survey conducted after the jobs report a week ago.
Most of the leading bond dealers do not see the Fed's easing cycle ending this month. Of the 25 firms polled, 18 expect another rate cut
at the June 26-27 FOMC meeting, while five see no move and two made no call.
Of those calling for another rate cut next month, 11 forecast a more gradual quarter-point cut while seven expected another half-point
move.
``There's a better than 50 percent chance, unfortunately, that the United States has slipped into a recession. And the Fed tends not to
stop cutting rates in that environment,'' said John Ryding, economist at Bear, Stearns & Co. in New York.
Eleven of the firms polled forecast the fed funds rate will fall to 3.50 percent by year-end, eight saw it at 3.75 percent and four put the
rate at 4.0 percent. Only Bear Stearns predicted a 3.0 percent fed funds rate at the end of 2001. |
