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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (38135)	6/25/2001 3:30:48 PM
From: Annette	Read Replies (1) \| Respond to of 65232

What is it? A new car from Honda?

To: Jim Willie CB who wrote (38135)	6/25/2001 3:33:38 PM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Size of Fed Rate Cut Seen a Tough Call Monday June 25, 2:06 pm Eastern Time By Caren Bohan <<WASHINGTON (Reuters) - With the U.S. economy skating perilously close to a recession, analysts say that an interest-rate cut from the Federal Reserve this week seems all but assured. Yet they are divided as to whether the Fed will stick with its recent pattern and reduce overnight rates by an aggressive half-point, or shift to a more cautious mode and move by only a quarter-point. At the meeting Tuesday and Wednesday, the debate may center on the possibility that the economy -- which economists generally agree is lackluster -- will pick up substantially later this year, sparking inflation risks. ``The argument (from some Fed officials) is likely to be that we may be at risk of overshooting'' on rate cuts, said Diane Swonk, chief economist at Bank One Corp. in Chicago. Any rate cut, which would be announced around 2:15 p.m. EDT on Wednesday, would mark the sixth this year. Already, the rate-easing spree that kicked off in January is one of the most aggressive in history. Swonk noted that the full force of the prior rate cuts would not be felt until later this year, at which time the economy could also get a jolt upward by refund checks of up to $600 that are being sent to households as part of the recently enacted tax package. In a Reuters survey, 14 of 25 bond trading firms that deal directly with the Fed predicted a cut of 25 basis points in the overnight federal funds rate, which is now 4 percent. The remaining 11 firms forecast a 50-basis-point decrease. FED CHIEF HASN'T SHOWN HIS CARDS One reason the meeting on Tuesday and Wednesday is a tough call for private economists is that Fed Chairman Alan Greenspan has done little to tip his hand, even though some of his colleagues have dropped hints they might lean toward a more gradualist move of a quarter-point. In public appearances over the last month, the Fed chief has offered assurances that inflationary pressures were contained, despite higher unit-labor costs. ``We see no evidence those costs are being passed through to final prices in any material way,'' Greenspan told the Senate Banking Committee on June 20. He did cite some concerns about the economy's health, though. He noted that layoffs, as measured by the weekly jobless claims, were rising but said there was no evidence they had caused consumers to stop spending. Some other Fed officials, such as Richmond Fed President Alfred Broaddus and Fed Governor Laurence Meyer, have been far more blunt and have seemed to highlight worries that the Fed could ``overshoot'' on the rate cuts. In a speech on June 18, Broaddus said ``we don't have a lot of leeway to reduce'' monetary policy further without getting to a level that causes ``difficulties.'' Broaddus currently is not a voting member of the FOMC but will participate in the rate discussion. For his part, Meyer has said that the Fed has to be careful that it does not ``create conditions that would lead to higher inflation as the expansion gathers momentum,'' referring to the prospect of a rebound in growth in the second half. But in describing the current circumstances, Meyer said that the economy was experiencing, ``if not a full-fledged recession, at least a close relative, a growth recession.'' A LIVELY DEBATE Meyer, as well as Broaddus and some other regional Fed bank presidents, were expected to voice concerns about the need to possibly pursue a more moderate course on rate reductions. ``This is a Fed of diverse views,'' Swonk said. ``It's going to take a lot to work through that diversity over the next few days.'' Ultimately, Swonk predicted the policy-setting Federal Open Market Committee would hash out a compromise, opting for only 25 basis points but including language in the rate announcement that could leave the door open to a another move prior to the next meeting on Aug. 21. One way the Fed could hint that it was mulling an inter-meeting move would be to say in its statement that it would ''monitor developments closely,'' something it did prior to the last two intermeeting moves which took place on Jan. 3 and April 18. Pierre Ellis, economist at Decision Economics in New York, was among those who thought the Fed would dispense with waiting and move forcefully, by a half-point this week. ``The chances of avoiding a recession are sinking,'' Ellis said. ``The Fed can't declare victory.'' Ellis said that the inflation ``hawks'' who may tend to resist a big rate cut may be brought around by recent data, notably a report by the central bank showing a 0.8 percent drop in industrial production in May. This marked the eighth consecutive monthly drop in output and pushed capacity utilization to its lowest rate since 1983. The bleak report boosted the odds that gross domestic product for the second-quarter might actually fall, which would be a worrisome sign since a recession is loosely defined as two straight quarters of declining GDP. ``The industrial production report requires you to lower your GDP estimate. I still think it's going to be above zero (in the second quarter) but it's going to be awfully close,'' said former Fed Governor Lyle Gramley, who is now a consultant for the Mortgage Bankers Association. Gramley's forecast was for a 50 basis-point cut.>>