Lehman Says Fed to Cut Interest Rates
NEW YORK (Reuters) - Lehman Brothers on Tuesday became the latest to join the ranks of Wall Street investment banks calling for Federal Reserve interest rate cuts in coming months to prevent a renewed recession.
Lehman Brothers said it expected the Fed to trim its benchmark overnight lending rate by 75 basis points to 1 percent by the end of the year. Previously, Lehman had forecast the Fed would keep interest rates steady until next year.
Lehman's co-chief U.S. economists, Ethan Harris and Steve Slifer, cited recent economic data showing the recovery stumbling, including weakening manufacturing and service sector growth in July, plunging consumer confidence, meek job gains and a drop in durable goods orders.
"While some of the weakness may reflect the normal ups and downs of the data, the concern is that this weakness is just the beginning of a growing shock to the economy," the economists wrote in a report titled "No Mas -- The Case For a Fed Easing."
Perhaps more important in changing their forecast, the Lehman economists said tightening conditions in credit markets would likely hurt business investment and hiring.
"The thing that was the final straw is the conversations with the credit strategists at Lehman talking about what a tough borrowing environment it is," Harris said, citing widening corporate bond spreads, tightening bank standards and a closed off commercial paper market.
"Really it's a story around an anemic recovery with little momentum, a falling stock market with the wealth affect showing up with a lag, and layered on top of that very tight credit conditions holding back on the corporate sector," Harris said.
The most likely scenario was for the Fed to change its risk statement at its policy meeting next week to declare a greater threat of renewed economic weakness and for it to cut rates by a quarter-percentage point in September, October and December, the economists said.
Currently the federal funds rate stands at 1.75 percent.
In the past few days, Goldman Sachs changed its forecast to a 1.0 percent fed funds rate by year-end and Deutsche Bank said the Fed would cut rates by 50 basis points in coming months. Both firms said the central bank would want to act preemptively against any threat of a so-called double-dip recession.
Dresdner Kleinwort Wasserstein is also calling for a Fed rate cut, to come at the Fed's Sept. 24 policy meeting. |
