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

To: Jim Willie CB who wrote (45800)	1/4/2002 3:57:14 PM
From: Sully-	Read Replies (1) \| Respond to of 65232

Poll: Jan. Fed Rate Cut Seen, Then Hikes By Ross Finley NEW YORK (Reuters) - The Federal Reserve is likely to cut interest rates once more in January, but a looming U.S. economic rebound means policymakers will be back on a credit-tightening path by the second half of the year, a Reuters poll of top bond dealers showed on Friday. Economists' forecasts for interest rate hikes came alongside building optimism that recovery would come sooner, as some shifted projections for an economic rebound to the first quarter of the year from the second. The survey, conducted after the government said the U.S. economy shed 124,000 jobs in December and the jobless rate rose to 5.8 percent, found 18 of 24 primary dealers predicted the Fed will cut its benchmark federal funds rate by a quarter percentage point at its Jan. 29-30 meeting. That is practically unchanged from the findings of the last Reuters survey, conducted in mid-December. While 17 dealers expect the fed funds rate to stand at 1.50 percent or lower by mid-year, 20 firm expect the Fed to nudge rates to 2.0 percent or higher by the end of 2002 after laying to rest one of its most aggressive easing campaigns in history. After 11 rate cuts totaling 4.75 percentage points since last January, the rate charged between banks for overnight loans currently stands at 1.75 percent, a 40-year low. ``Ultimately whether the Fed ends up easing by 475 basis points or 500 basis points, the bigger issue for markets in 2002 is going to be how soon and how aggressively they start tightening again,'' said James O'Sullivan, senior economist at UBS Warburg in Stamford, Connecticut. Evidence of an impending turnaround in manufacturing, renewed growth in the services sector, a bounce in consumer confidence and steady spending over the Christmas holiday season have begun to overshadow economists' lingering concerns about a weak labor market. MARKETS AHEAD Financial markets have already placed hefty bets on an imminent recovery. The major U.S. stock indexes have rushed through key thresholds and are now back to levels hit in late August, just before the Sept. 11 attacks put off whatever incipient signs of a recovery then existed. U.S. Treasury yields have spiked higher since early November on recovery hopes and interest rate futures contracts have priced in nearly 100 basis points of tightening by year's end. ``Consumers are not holding back tremendously and, at the same time, the manufacturing sector has by and large completed its inventory correction,'' said Peter Kretzmer, senior economist at Banc of America Securities in New York. ``When you put those two together that gives us a fair amount of assurance that we're going to get a recovery,'' said Kretzmer, who believes the Fed will take back 75 basis points on the funds rate by the end of June to 2.50 percent. UNEMPLOYMENT TO PEAK SOON Still, with labor markets weak, the Fed will likely be compelled to cut interest rates one more time, at the very least, as a so-called ``insurance policy'' on its 4.75 percentage points of easing since the outset of 2001, economists said. ``Typically the Fed doesn't stop easing until the unemployment rate stops rising,'' O'Sullivan said. ``Obviously the unemployment rate rose again in December and certainly the latest (weekly jobless) claims number suggest the trend is still up. So we think on balance they'll probably do one more in January.'' But with most economists forecasting a peak in the unemployment rate sometime before the middle of the year, the Fed should have leeway to raise rates again should it become necessary to put the brakes on a quick snap-back in growth. And that's where the dissent lies. Some economists, like John Ryding, chief market economist at Bear Stearns & Co., do not see the unemployment rate falling fast enough or growth picking up quickly enough to raise the specter of inflation anytime during the next 12 months. Faced with the likely prospect of subpar economic growth until at least the middle of this year, the Fed will opt to wait on interest rate hike, lest it jeopardize the incubation stage of what could be a fragile recovery, Ryding said. ``They don't want to be accused of aborting the recovery when there's no inflation pressures. I don't think the Fed will raise rates until the unemployment rate starts to move decisively lower. And I don't see that happening this year.'' biz.yahoo.com