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Strategies & Market Trends : Mu Gamma Lambda -- Ignore unavailable to you. Want to Upgrade?

To: Rich1 who wrote (3856)	8/11/2001 10:36:59 AM
From: Augustus Gloop	Read Replies (1) \| Respond to of 10077

Saturday August 11 9:24 AM ET Rate Cuts May Extend to 2002-Wall Street NEW YORK (Reuters) - The Federal Reserve (news - web sites)'s interest rate cuts could extend into next year because an economic recovery will likely take longer to gather momentum than previously thought, leading Wall Street firms said this week. Economists had expected the economy to begin recovering from its slump sometime in the second half of this year and interest rates to start heading higher in the first quarter of next year. But investment bank Goldman Sachs on Friday revised its growth forecast for next year down to 2.0 percent from 2.5 percent previously and said rates could keep falling until the middle of next year. Goldman last week predicted the Fed would cut the 3.75 percent federal funds rate on overnight bank lending to 3.50 percent by the end of the year. Updating its forecast on Friday to reflect new data pointing to persistent economic weakness, Goldman said it now sees fed funds falling to 3.0 percent by the middle of next year. ``The driving force behind these changes is the revelation, in revisions to the national income and product accounts, that corporate profits have been a lot weaker in recent years than previously thought,'' the firm said in a research note. ``That means the return on capital has also been lower, dimming the outlook for business investment.'' The Fed has already slashed the funds rate by a total of 2.75 percentage points in six rate cuts since the beginning of the year. It is widely expected to make another quarter-point reduction at its next meeting on August 21. Earlier this week, former Fed Governor Wayne Angell predicted the Fed would cut rates two more times this year and twice early next year, bringing the funds rate to 2.75 percent by the end of the first quarter of 2002. Angell, now chief economist at Bear, Stearns & Co., said he expected the government's initial estimate that second-quarter gross domestic product grew at a paltry 0.7 percent annual rate to be revised down to zero. ``It also appears that the third quarter is starting on as weak a note as the second quarter ended on,'' Bear Stearns said, adding there could be a contraction in this quarter. Angell predicted the overhang of capital equipment will result in sub-par growth rates over the next year. Economists became more pessimistic after a number of negative reports in the past two weeks. U.S. companies announced record layoffs in July, bringing the total so far this year to nearly one million, according to outplacement firm Challenger, Gray & Christmas. The National Association of Purchasing Management, in releasing its July survey of activity in the factory sector, said problems ran much deeper than anyone imagined. Then the Fed spooked the markets on Wednesday with a report saying weakness in the manufacturing sector was spilling over into other parts of the economy, suggesting the weakness may be more pervasive than originally thought.