For Wall Street, Fed Rate Cut a Done Deal
NEW YORK – Although uncertainties abound on the timing and speed of the U.S. economic recovery, the Wall Street community is sure of one thing — the Federal Reserve will cut interest rates for the 11th time this year when it meets on Tuesday.
But many also believe the central bank will signal that its aggressive credit lowering is drawing to a close by making a quarter-point reduction instead of the bigger half-point moves it has favored for most of this year.
A Reuters survey on Friday found top bond dealers are unanimous in expecting the Fed to push the U.S. benchmark rate for overnight bank lending down by one-quarter percentage point to 1.75 percent at its meeting on Tuesday.
That would be the lowest target for short-term interest rates since 1961. The Fed's moves have pushed market rates down as well, with the prime lending rate, the benchmark rate for millions of consumer and business loans, now at 5 percent, the lowest level since June 1972. The prime stood at 9.5 percent when the year started.
Unemployment a Key Factor
Some analysts had thought that the central bank might decide to leave rates unchanged at its final meeting of the year given some tentative positive signs, such as stronger-than-expected auto sales in October and November and a big jump in factory orders.
Those views changed on Friday when the government reported that the unemployment rate shot up to 5.7 percent in November as another 331,000 Americans lost their jobs, bringing total job losses over the past two months to 800,000, the largest total in 21 years.
"Given the dismal unemployment report, a quarter-point cut is a fait accompli,'' said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.
"It's very hard for the Fed to stop easing until the unemployment rate stops rising,'' said James O'Sullivan, senior economist at UBS Warburg in Stamford, Connecticut, pointing to a widely accepted view and historical trend.
All of the 24 primary dealers in U.S. government securities, who work directly with the Fed in the markets, forecast a quarter percentage point rate cut on Tuesday, up from 23 dealers in the last Reuters poll, which was conducted in early November before the United States was officially declared in recession.
Another 16 dealers said they expect a follow-up quarter percentage point cut at the Fed's January policy meeting and 16 dealers expect the federal funds rate to be 1.50 percent by mid-2002, up from 12 in the last poll.
All Eyes Already on January Meeting
The central bank launched the current easing campaign with a surprise half-point cut on Jan. 3, in between its regular meetings. In the 10 rate cuts so far this year, seven came at regularly scheduled meetings and three occurred between meetings, including one on Sept. 17, the day Wall Street reopened following the Sept. 11 terrorist attacks.
Many analysts believe that while the central bank will leave the door open for further rate cuts early next year, the move back to a quarter-point instead of a half-point move will signal that the Fed believes it has done enough to guarantee an economic rebound by the spring.
A spate of upbeat economic reports, including record personal spending in October, resilient home sales, hints that a deep manufacturing recession may be nearing an end and stabilization in a key measure of consumer confidence, have fueled market hopes for a recovery.
The Dow Jones industrial average raced last week through the key 10,000 mark for the first time in three months while the U.S. government bond market sold off sharply as investors became increasingly comfortable taking on more risk.
But economists are not convinced signs are sufficient for the Fed to change direction quite yet.
Most economists believe the 5.7 percent unemployment rate will surge above 6 percent over the next few months. Some, like HSBC Securities Chief Economist Ian Morris, see unemployment headed up to 7 percent — perhaps as early as March.
That means the Fed is likely to remain in easing mode for some time yet, economists said.
"There is not enough time between now and the late January meeting for the Fed to get enough convincing evidence that things are turning around,'' said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago. His firm predicts back-to-back rate cuts in December and January.
"I don't think they're going to be seeing that (recovery) within the next month and a half,'' he said.
Reuters and the Associated Press contributed to this report.