RATE CUT - Wall St bets on half a point

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Wall St. Bets on Half-Point Fed Rate Cut

NEW YORK — After a week's worth of data that testified to the devastating impact of the Sept. 11 attacks on the U.S. economy, Wall Street's money is on another half-point interest-rate cut by the Federal Reserve when its board meets on Tuesday.

In a Reuters poll of the 24 primary dealers of U.S. government securities conducted on Friday, 15 predicted the policy-setting Federal Open Market Committee (FOMC) will lower the 2.5 percent federal funds rate on overnight bank lending to 2.0 percent on Tuesday.

The other nine firms who deal directly with the central bank in money market operations said the Fed would opt for a smaller quarter-point rate cut this time around. In the previous poll on Oct. 2, all 23 dealers questioned predicted a quarter-point cut.

The poll was conducted after the U.S. Department of Labor reported the unemployment rate shot up to 5.4 percent -- the highest in about five years -- from 4.9 percent in September . The economy shed a staggering 415,000 jobs in October, the deepest monthly decline in more than two decades.

"The data is weak everywhere one looks, even in sectors that one would have expected to hold up, one being construction,'' said economist Alan Ruskin of 4CAST Ltd. in New York. "We are seeing extreme weakness in the service-producing sector, suggesting a marked broadening of the slowdown.''

The dismal jobs report capped a week of data showing the economy contracted 0.4 percent in the third quarter, the weakest performance since the last recession in 1991, while consumer confidence and spending plunged and a manufacturing slump deepened.

"It seems clear after looking at these reports there was a profound impact from the terrorist attack,'' said Mike Moran, chief economist at Daiwa Securities America in New York. ``I think it will be temporary, but the Fed will want to have an accommodative policy in place. They will want to have some insurance.''

Moran said he revised his forecast for next week to a half-point cut from a quarter after seeing the unemployment report and other data earlier this week.

Some Still Expect 1/4-Point Cut

All but three of the firms polled expect the FOMC to cut rates again at its Dec. 11 meeting. Twenty expect a quarter-point cut at that time. The 24th, Credit Suisse First Boston had the most aggressive forecast of any primary dealer -- back-to-back half-point rate cuts this month and next.

Those who expect a smaller rate cut next week say there is already massive economic stimulus in the pipeline and energy costs are falling as global economic activity wanes.

The Fed has already cut rates nine times this year by a total of 4.0 points. The government gave Americans $38 billion in tax rebates before the attacks in September. Another $40 billion was earmarked for emergency aid after the attacks and added fiscal spending in the wake of Sept. 11 could reach $100 billion.

Additionally, the Treasury Department's decision this week to scrap future sales of 30-year government bonds brought long-term market interest rates down sharply, which may add a mild stimulus to the economy by pulling mortgage rates down.

Oil prices also dipped below $20 a barrel for the first time in more than two years on Friday.

"Does 25 basis points really matter?'' said Steve Ricchiuto, chief U.S. economist at ABN AMRO Inc. in New York. "The answer is: 'If it does, we're in big trouble.'''

Ricchiuto expects a quarter-point rate cut next week.

There is virtually unanimous opinion on Wall Street that the economy has now slipped into a recession -- typically defined as two straight quarters of contraction. Of the 24 primary dealers polled, 23 said the country is in a recession and one did not answer the question.

"Financial markets are set up as if we are in recession,'' said James Glassman, senior economist at J.P. Morgan Chase Securities in New York. Glassman predicted a quarter-point cut on Tuesday.

"The Fed already cut rates by 100 basis points after the attack because they anticipated this. Rates aren't the problem. They've got rates very low and they are trying hard to look forward,'' he said.

There it little optimism for a quick turnaround in the economy, and most see weakness lingering at least until the middle of next year. Twenty of the 24 dealers expect the fed funds rate to be 2.0 percent or lower by mid-2002. A few firms think the Fed will have begun raising rates by the middle of the year.

But some say there is little more the central bank can do to turn the economy around. At this point, the recovery comes down to fiscal stimulus and restoring a sense of personal security for Americans traumatized by the attacks that killed nearly 5,000.

-- Anonymous, November 05, 2001


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