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To: pallmer who wrote (5048)	1/22/2003 3:26:13 PM
From: pallmer	Respond to of 29609

-- POLL-Wall Street sees Fed on hold in uncertain times -- By Victoria Thieberger NEW YORK, Jan 22 (Reuters) - Top bond dealers on Wall Street are certain the Federal Reserve will keep interest rates steady when it meets next week, but a few say the Fed will concede the outlook for the stumbling economy has weakened. Most of the economic news in recent weeks has been disappointing, showing a stagnant jobs market, falling industrial output and weak consumer sentiment. The exceptions have been surging car sales and housing starts, which have helped stave off another downturn in growth. A Reuters survey of the primary bond dealers that trade directly with the Fed found no one expects another cut in the already low 1.25 percent federal funds rate at the end of the two-day policy meeting on Jan. 28-29. But 3 of 22 dealers polled say the central bank, in an accompanying statement, is likely to acknowledge that the risks to the economy are for weaker growth rather than inflation. Another three dealers said it was too close to call. "At some point, the Fed just calls it as they see it," said HSBC Securities USA chief economist Ian Morris. Among the reasons for the Fed to shift to a statement highlighting weakness, Morris cited declining payrolls and industrial production, flat retail sales outside of autos, low inflation and high oil prices. Most of those polled believe the Fed will not want to change its message. An actual cut in interest rates next week is considered unlikely as the Federal Reserve waits to see how any confrontation with Iraq plays out and its potential effect on oil prices, sentiment and the economy. "Iraq adds to the uncertainty and provides a reason for the Fed to do a little more watchful waiting," said Banc of America Securities senior economist Peter Kretzmer. Increasingly hawkish rhetoric from the Bush Administration in recent days has spooked financial markets, pushing gold prices up near a six-year high and hammering U.S. stock markets. The Fed cut rates by a large half percentage point in early November to a fresh four-decade low of 1.25 percent, and even those economists who do expect another easing say it will not happen until March. FAIR CHANCE OF A CUT Most economists think the economy is going through a temporary slowdown, rather than the start of a second downturn. Extra stimulus in the form of tax cuts is likely later this year, but could come too late for the current weakness. The survey found 5 of 22 dealers expect the Federal Reserve will cut interest rates at its next policy meeting in March, arguing that the economic data in the meantime will show little improvement from recent sluggishness. "The unemployment rate is rising and the soft spot is lasting longer than the Fed anticipated," said CIBC World Markets senior economist Avery Shenfeld. "By March, they won't be saying 'Why cut rates?' They'll be asking themselves 'Why not cut rates?'" he said. Shenfeld expects a modest quarter-point cut at that time, but he is less sure whether the Fed will signal a willingness to ease again by shifting its risk statement next week. The central bank confused markets and confounded economists in November when it cut rates and asserted the risks to the economy were balanced. The economic data at the time were soft, and inflation has been so subdued that most analysts believe falling prices are a bigger threat than runaway inflation. Many concluded the Fed was trying to be reassuring on the outlook. With much of the economic news since then turning out to be soft and the risks pointing to growth being too slow, analysts wonder whether the Fed will concede that or try to shore up confidence by still speaking of balanced risks. "I'm an optimist, but I never believed that the risks were neutral in November. Nor do I think they're neutral now. The best argument for them shifting is acknowledging reality," said Merrill Lynch senior economist Gerald Cohen, who is nevertheless unsure whether the Fed will alter its outlook. Overall, economists in the Reuters survey saw a relatively high 39 percent chance that the Fed will ease rates again sometime in 2003, after 12 cuts over the past two years. Much hangs on the imponderable question of how any war with Iraq will impact on the economy. A brief confrontation with no immediate retaliation could boost business and consumer spirits, while long and drawn-out hostilities would extend the period of uncertainty that has stymied a robust recovery. "That uncertainty takes some of the focus off the Fed in this situation as well," said Banc of America's Kretzmer, who expects a long period of steady rates. ((Reporting by Victoria Thieberger; editing by Dan Grebler; Reuters Messaging: victoria.thieberger.reuters.com@reuters.net; +1 646 223 6300)) (C) Reuters 2003. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world. nN22136496 22-Jan-2003 20:24:42 GMT Source RTRS - Reuters News