Fed Rate Cut Seen In Early '07 -Bond Mkt Assn
(Updates with comments on expected Fed rate cut in paragraphs 6-8)
By Brian Blackstone
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--After an expected quarter-point interest rate hike this week to 5.25%, the Federal Reserve likely will raise rates an additional 25 basis points by the end of the year, an economic committee of the Bond Market Association said Tuesday.
But with the economy seen slowing later this year and into next year, the Fed likely will cut rates by one-quarter percentage point "sometime in early 2007," the BMA said in a release.
A 25-basis-point hike in the federal funds rate is a near certainty following the Fed's next meeting on June 28-29. "The real question is what the Fed will say in its accompanying statement," said Michael Decker, BMA's head of policy and research.
"Most (BMA) committee members expect the statement to be consistent with past pronouncements that further tightening could be needed to address inflation," Decker said, though some BMA panel members think the Fed "will acknowledge that a moderation in economic growth is already under way."
The BMA panel expect U.S. gross domestic product to expand 3.4% on average in 2006 and drop to 2.9% growth in 2007, with the economy driven by business investment, supportive fiscal policy, strong productivity and stabilizing energy costs. Consumer spending growth is seen slowing to 2.8% next year from 3.2% in 2006.
With sub-3% GDP growth below the rate most economists peg as the economy's noninflationary potential, the Fed is expected to lower the Fed funds rate to 5.25% in the first quarter, where it will stay for the remainder of the year, according to the BMA panel.
Robert DiClemente, chief U.S. economist at Citigroup and BMA economic panel chairman, called the expected rate cut a "fine tuning, late cycle adjustment" and not the start of a significant easing campaign.
"I don't think the sense of most (BMA) members is that the Fed is in a serious overshoot that requires a huge reversal," he said.
BMA projects that the personal consumption expenditures price index excluding food and energy - the Fed's preferred inflation gauge - will reach 2.9% annualized growth in the second quarter of 2006 before declining to 2% by the end of 2007. The Fed's comfort zone for the core PCE index is thought to be between 1% and 2%.
Though high energy prices, rising labor costs and a weak dollar remain upside inflation risks, "the Federal Reserve has consistently stated its intention to remain vigilant about fighting inflation and controlling inflationary expectations," DiClemente said.
BMA expects the 10-year Treasury yield to fetch around 5.25% at the end of September and stay there through mid-2007. The 10-year Treasury currently fetches around 5.2%.
-By Brian Blackstone, Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com
(END) Dow Jones Newswires
June 27, 2006 14:02 ET (18:02 GMT)
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