By Huw Jones
NEW YORK, Oct 30 (Reuters) - Wall Street expects the Fed to
cut rates again despite the recovery in stocks, fresh steps by
global policymakers to tackle credit squeezes, and a surprising
rebound in U.S. economic growth, analysts said.
Shares could tumble if the Fed came up emptyhanded in
November or December, even though the central bank's key reason
for easing, to tackle a credit squeeze, could become less
pressing by then, analysts said.
At the very least, the Federal Reserve might think twice
before enacting a string of additional cuts when the economy is
healthier than expected and stocks are up sharply from their
summer selloff, and after two rate cuts already in the past
month, some strategists argued.
"There is a chance the Fed won't cut because the economy
will do better than most people think," said Joseph
Battipaglia, chief investment officer at Gruntal & Co.
Pressure on the Federal Reserve to ease may also lighten
after policymakers in the Group of Seven industrialized nations
unveiled a new package of far-reaching reforms aimed at shoring
up the global financial system, whose problems have already
tipped many economies into recession.
The International Monetary Fund will get an extra $90
billion to tackle the credit crunch problem. The Fed said it
cut rates in October to avoid a money squeeze.
Still, most think one more cut is likely before year-end.
"We do think the strong GDP reduces the possiblity of an
extended period of Fed easing, but there will be one more Fed
cut of 25 basis points," said Christine Callies, chief
investment strategist at Credit Suisse First Boston.
The Street's renewed bullishness hinges on the Fed.
"What's holding investor optimism is the hope that the Fed
will continue to cut rates," said Sam Stovall, chief stocks
strategist at Standard & Poor's.
"Our forecast is that the Fed could cut rates to 4 percent
by sometime next year," Stovall added.
The Fed's rate setting committee meets next on Nov. 17. The
key federal funds rate is currently at 5 percent.
"I think a November cut has been more than discounted, so
if it does not happen, it could make things a little
uncomfortable," said Harvey Hirschhorn, chief economist and
investment strategist at Stein Roe and Farnham.
The Dow rallied more than 100 points to a two-month high
Friday on news the resilient U.S. economy was back on an even
keel in the third quarter, when gross domestic product grew 3.3
percent amid tame inflation, well up from a forecast 2.1
percent and nearly double the prior quarter's 1.8 percent
growth rate.
Still, Wall Street believes the Fed has enough excuses to
keep cutting rates to underpin stocks, especially after
corporate profits in the third quarter were set to be the worst
in seven years.
"If profits couldn't grow with 3.3 percent (GDP growth)
then what's going to happen to profits if we get the slowdown
we expect? And profits are what drive the market," said Alan
Kral, vice president and portfolio manager at Trevor Stewart
Burton Jacobsen Inc.
GDP rose sharply partly because of ballooning inventories,
though consumption remained robust.
"What the data shows is the U.S. economy is extremely
resilient and the risk of recession has been well overstated,
but a slowdown is already written in the script," Hirschhorn
said.
That slowdown could be glimpsed even in Friday's GDP data,
as business spending fell one percent in the third quarter
after a 12.8 percent second quarter jump.
"We are already a good month into the fourth quarter and
other indicators are pointing to a slowdown, so I don't think
the GDP data will cause a substantial change in the way the Fed
looks at the world," said Charlie Crane, chief market
strategist at Key Asset Management.
The widening trade deficit, falling new home sales, and a
decline in consumer confidence also point to an economy moving
off its peak, analysts said.
But it may not matter whether the economy is able to avoid
a recession with or without more Fed cuts as long as the net
effect on 1999 corporate earnings is positive.
"If we still get to where we want to go, does it matter we
took the high way or the low way?" Stovall said.
((Wall Street Desk, 212-859-1737))
REUTERS |
