day September 25, 12:44 pm Eastern Time
POLL -- Fed seen easing next week, maybe by 50 bps
By Scott Gerlach
NEW YORK, Sept 25 (Reuters) - Fearing the U.S. economy cannot emerge unscathed from the storm pummeling world markets, the Federal Reserve seems poised to lower interest rates next week by as much as 50 basis points, economists polled by Reuters nearly unanimously agreed.
Twenty-seven of 28 economists at U.S. primary dealerships projected a cut of at least 25 basis points in the federal funds rate -- the rate banks charge their best customers for overnight loans -- at next Tuesday's policy meeting. Five of the experts saw a 50-basis-point move.
As recently as last week, economists maintained a much more divergent rate outlook. Only eight of 20 surveyed then forecast an easing of the 5.50-percent federal funds rate.
Since then, emerging markets eroded further, a respected hedge fund revealed massive losses and, perhaps most important, Fed chief Alan Greenspan told Congress the U.S. must act quickly ''to prevent the contagion from really spilling over'' into the United States.
''Anybody who thinks the U.S. economy is doing well is looking in the rearview mirror,'' said David Rosenberg, senior economist at Nesbitt Burns.
While recent economic data reflect a less robust -- but still growing -- U.S. economy, weakness in stocks and all but the highest-grade fixed income markets portend trouble ahead, analysts said.
An immediate Fed easing could improve investor sentiment and might help stem the dramatic exodus of capital from world markets, they said.
''The Fed should be proactive,'' said Stan Shipley, senior economist at Merrill Lynch. ''They have to have a good idea of where the economy is, but they also have to ask the question, 'Where is the economy going?'''
Financial markets' performance in recent days raised the odds the economy is going south, analysts said. Even after Greenspan, in his Wednesday testimony, apparently laid out plans for an ease, domestic stocks managed only a one-day surge.
Then, news of a Fed-organized bank bailout for the decimated hedge fund Long-Term Capital Management raised fears larger systemic problems would emanate from the global contagion.
To significantly alter sentiment in this environment, the Fed may need to trim rates by 50, rather than 25, basis points next week, some experts said.
''The worst thing that could happen for the Federal Reserve is a 25-basis-point rate cut that is followed by an equity selloff, a bond market selloff and a widening of credit spreads,'' said Patrick Dimick, financial market economist at Warburg Dillon Read, one firm looking for a 50-basis-point cut.
The reaction to a small ease might not be so negative, but the Fed will go out of its way to avoid such a retrenchment in investor sentiment, Dimick said.
While they voiced optimism about the psychological improvement a rate cut would produce, economists noted that real economic effects lag monetary policy shifts by several months.
''These actions are not doing anything to help the economy this year,'' said James Glassman, a senior economist at Chase Securities, who forecast 75 basis points of easing by yearend.
A fed funds rate cut should steepen the yield curve -- the spread between long- and short-term Treasury yields -- allowing banks to borrow at lower rates and lend at more lucrative levels. That would bolster their own balance sheets without producing easily discernible economic results, analysts said.
Banks probably would cut their prime lending rate in the wake of a Fed easing. (One, Southwest Bank of St. Louis, lowered its prime rate on Thursday to 8.00 percent from 8.50 percent.) That lessens consumers' interest payments on credit card borrowings and some home equity loans.
But consumers actually receive more interest than they pay, Chase's Glassman noted.
A dramatic decline in longer-term rates could spur activity in rate-sensitive sectors of the economy, such as the housing market. But long rates, already at multi-decade lows, have benefited more from capital flight out of troubled foreign markets than from expectations of domestic rate cuts.
Foreign economies, however, stand to gain more from next week's expected Fed action than does the United States, even if central bankers decide on a half-point move, economists said.
''I don't see any sector of the U.S. economy getting a near-term jolt from a 50-basis-point rate cut,'' Warburg's Dimick said. ''I see lots of things overseas getting a near-term jolt -- i.e., capital inflows to some of these markets.'' |
