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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Boplicity who wrote (72713)	3/19/2001 3:06:06 PM
From: stockman_scott	Read Replies (1) \| Respond to of 99985

Growing Camp Sees Large Fed Rate Cut Monday March 19, 2:40 pm Eastern Time By Caren Bohan <<WASHINGTON (Reuters) - As Wall Street writhes in suspense over Tuesday's Federal Reserve meeting, a growing number of analysts believe Alan Greenspan and Co. may offer the weak U.S. economy a stiff dose of medicine in the form of a 75-basis-point interest-rate cut. Expectations of a three-quarters of a percentage point move are far from unanimous -- a Reuters poll showed that as of Monday, 13 of the top 25 Wall Street bond firms forecast a cut that size, while 12 thought a half-point move was more likely. But the 75-basis-point camp has gained followers in recent days, including several former Fed officials. ``The odds of a 75 basis-point move are somewhat better than 50-50,'' former Fed governor Lyle Gramley said. ``The Fed hasn't gotten much traction out of the monetary policy actions it has taken so far.'' Helping to reinforce the case for stronger action are comments Fed Chairman Alan Greenspan made last month in which he eschewed the interest-rate gradualism that had been the central bank's trademark in the past. ``Old economic policy must indeed adjust itself for the changing timeframe in which the economy itself is moving,'' Greenspan told lawmakers on Feb. 28. FASTER ADJUSTMENTS, FASTER POLICY The Fed chief said ``adjustments'' in the economy, such as pullbacks by businesses in response to weaker demand, appear to happen more quickly in the Information Age, warranting a faster-paced interest-rate policy. ``Because the advanced supply-chain management and flexible manufacturing technologies may have quickened the pace of adjustment...the Federal Reserve has seen the need to respond more aggressively than had been our wont in earlier decades,'' Greenspan said. The Greenspan-led Fed's signature style was quarter-point moves, or occasionally half a point, which were often preceded by weeks -- or even months -- of comments by Fed officials setting the stage for them. Although Greenspan made the February comments as a way of explaining the two rapid-fire half-point cuts the Fed made in January, many analysts said they could indicate a willingness to step up the pace in future moves. ``It's striking how quickly the economy seems to have downshifted,'' said Princeton University economist Alan Blinder, a former Fed vice chairman. Fed officials will gather at 9 a.m. EST on Tuesday for what is sure to be a lively discussion of the economy and interest rates. It is expected to announce its decision at 2:15 p.m. EST. Investors in financial-market futures contracts pegged the odds of a cut of three-quarters of a point at around 64 percent. The key federal funds rate -- charged for overnight lending between banks -- now stands at 5.5 percent. If the Fed cuts that rate to 4.75 percent, it would mark the sharpest single-step reduction since it cut the discount rate by a full percentage point in December 1991. That was after the official end to the 1990-91 recession but the economy was still in a severe credit crunch. The comparison with the discount rate move is relevant because during the early 1990s, this rate rather than the funds rate was the Fed's most visible tool for monetary policy. Asked his prediction for the outcome of the Fed meeting, Princeton's Blinder said he didn't know but added: ``If I had my druthers I would do the bigger cut.'' Fed alumnus Gramley, who is now a consulting economist with the Mortgage Bankers Association, agreed with that advice and said he hoped the Fed would take it. A TOUGH CALL The Fed will have a complex picture to consider on Tuesday. Consumer sentiment has plunged sharply in recent months but had a slight rebound in the latest University of Michigan survey. The job market, by most indications, remains tight with the unemployment rate a low 4.2 percent. But the stock market has been clobbered in recent weeks and business sentiment seems to have eroded sharply, portending weakness in spending and hiring. Last week, the tech-heavy Nasdaq plunged below the key 2,000 level and the blue-chip Dow index fell below 10,000 for the first time since October. Selling has hacked more than 1,000 points off the Dow since the last rate cut on Jan. 31. Several analysts who saw a 50 basis-point cut on Tuesday suggested that a more forceful move might signal panic -- or perhaps an effort by the Fed to try to offer a cushion to the stock market, instead of paying attention to the economy. ``The risk of going 75 is that it could be perceived outside of the financial markets as pandering to financial markets,'' said Diane Swonk, chief economist at Bank One in Chicago. But Christopher Wiegand, economist at Salomon Smith Barney in New York countered: ``They would have to move 100 to look desperate.'' Many experts also noted the Fed did not cave in to market pressure to cut rates in the intermeeting period leading up to Tuesday's meeting, something stock investors loudly clamored for.>>