To: 2MAR$ who wrote (663 ) 6/22/2001 10:24:54 AM From: $Mogul Respond to FED TALK: Fed easing expectations are little changed today with the market continuing to price in a little less than a 50% chance that the Fed cuts rates by 50 basis points instead of 25 bps at next week's meeting. The July Fed Funds contract has been hovering around the 3.64% level all week and will probably continue to do so heading into the FOMC meeting that begins Tuesday (the rate decision will come on Wednesday). So it's essentially a toss-up as to whether the Fed slows the pace of its easing campaign, and with good reason. The continued weakness in economic data, benign inflation reports and low inflation expectations and increasing signs of weakness in overseas economies all suggest another 50 basis point cut. On the other hand, another 50 bps cut could rekindle the inflation concerns that became evident in the wake of the last 50 bps cut, raising long-term rates. It would also likely cause the market to believe the Fed is done cutting rates, since Fed Fund and eurodollar futures price in only another 50 bps of cumulative easing. With the Fed perceived to be done, there would be little to drive market interest rates lower since weak economic data would essentially be priced in. Another 50 bps cut is also unlikely to have much impact on business investment, as the Washington Post's John Berry noted Thursday, or provide a sustained boost to equity market as earnings remain weak. Expectations could be the deciding factor, since a compelling arguement can be made either way and the Fed would probably prefer not to disappoint the market at this stage. On that note, the wire services will be coming out with surveys as soon as today indicating dealers' expectations, which may break the tie. Dealers appear to be leaning increasingly toward 50 bps, with Goldman Sachs said to have changed its forecast from 25 bps to 50 bps just today. Perhaps the Fed will reach a compromise by cutting rates 25 bps and noting that they will continue to monitor the situation during the long period between meetings (the longest this year).
