Poll: Another Deep Rate Cut Ahead

NEW YORK – A surprise plunge in U.S. payrolls in April pushed Wall Street economists on Friday into near agreement that the Federal Reserve will cut interest rates by a half point for the fifth time this year when it meets in less than two weeks.

The very weak jobs report seems to have ended weeks of speculation that a widely expected cut at the Fed's May 15 meeting could be smaller, given resilience seen in key sectors of the economy such as housing and consumer spending.

A Reuters poll of top bond firms that deal directly with the Fed in financial markets found 24 out of 25 expected the Fed's policy-setting Federal Open Market Committee will cut the U.S. benchmark overnight bank lending rate to 4.0 percent at its next policy meeting. Just 15 out of 25 dealers held this view a little over two weeks ago.

``This pretty well rules out the option of relaxing a little and going to a 25 (basis point cut),'' said Jim O'Sullivan, economist at UBS Warburg in Stamford, Conn., shortly after the government reported the U.S. economy shed 223,000 jobs in April, the worst monthly loss in a decade.

Interest-rate sensitive shorter-dated U.S. Treasuries flew higher on the jobs news, pushing yields lower, while stocks rose as the market factored in accelerated expectations of Fed rate cuts.

``From the Fed's perspective, effectively we are in recession because the labor markets are in recession ... You've got the unemployment rate up 0.6 percent and you just don't get increases like that outside of recessions,'' O'Sullivan said.

The unemployment rate in April rose to 4.5 percent, its highest level since October 1998 and compared with a three decade low of 3.9 percent seen last year.

The outlook for interest rates beyond the May 15 meeting was less clear, with 11 firms forecasting a quarter-point cut at the June 26-27 meeting and eight expecting another half-point cut at that time. Six firms expected no move, the poll showed.

With the next Fed rate policy meeting less than two weeks away, economists saw little chance of another surprise rate cut between regular meetings. The Fed has used this strategy twice this year, the last time on April 18.

But Still No Recession

Despite all the doom and gloom about jobs, the same poll of economists found that most think the world's largest economy will skirt a recession, defined as two straight quarters of shrinking gross domestic product. But the chances are rising.

Dealers forecast, on average, a 39 percent chance of a recession compared with 33 percent in a similar poll two weeks ago. One firm, Morgan Stanley, believes the economy already is in recession.

While economists were convinced the Fed has more easing to do, some said the April jobs report was not all that surprising, given the pace of layoff announcements over the past several months.

The Fed has slashed borrowing costs by two percentage points so far this year -- cutting twice between regular meetings -- in a bid to stop the slowing U.S. economy from halting its record, decade-long expansion.

One firm, HSBC Securities (USA), forecast a quarter-point cut on May 15.

Ian Morris, chief U.S. economist at HSBC, noted that the Fed has been very aggressive already in 2001 in lowering borrowing costs. Given that layoffs tend to come late in an economic cycle, the Fed is unlikely to need to cut interest rates as aggressively going forward, he argued.

``They would be out of bullets with too many goes,'' Morris said.

Those words found echoes with other economists forecasting a more aggressive move, who qualified their figures by saying that the Fed's sizable slashing in borrowing costs over the past four months needed time to seep into the economy.

``You just can't expect to issue an interest rate cut and expect to have the ocean liner turn on a dime. You just have to wait a little bit for this to play itself out,'' said Steve Gallagher, economist at SG Cowen Securities, who expects a half-point cut on May 15 to be the Fed's last in the cycle.