Some See Bigger Fed Rate Cut in June

NEW YORK – Top Wall Street firms see a growing chance of another big Federal Reserve interest rate cut later this month as the U.S. economy shows no signs of recovering from its downturn, a Reuters poll showed on Friday.

But 19 of the 25 primary dealers of U.S. government securities still think a small quarter-point cut in the 4.0 federal funds rate on overnight bank lending is the best bet.

The number of firms forecasting a half-point cut doubled to six from three in the prior poll on June 1.

And that number could well rise in the coming days. Some of the firms calling for a quarter-point cut said they were leaning heavily toward raising that forecast next week. The policy-setting Federal Open Market Committee meets next on June 26-27.

In the prior poll, 19 of the firms who deal directly with the Fed in the money markets expected a quarter-point cut this month but three saw no move. Those three firms have now shifted their forecast to a quarter-point cut while three others increased the forecast from a quarter point to a half point.

``At the moment there are no signs of a turnaround,'' said Bruce Steinberg, chief economist at Merrill Lynch in New York, one of the firms that raised its forecast to a half-point cut. ''We expect a recovery, but I think the risks are still on the downside and the Fed will continue to cut rates aggressively.''

A quarter-point cut would represent a slowdown in the aggressive pace of Fed easing this year. So far, the central bank has cut the fed funds rate five times by half a point, or a total of 2.5 percentage points.

The fed funds futures contract, a barometer of Fed expectations in the bond market, was pricing in about a one-in-three chance of a half-point cut this month, but earlier this week it had reflected only about a one-in-five chance.

Lingering Malaise

Economists did not peg the shift in rate sentiment to any one piece of economic data in the past two weeks but said there appeared to be a general worsening in employment, manufacturing, corporate profits and the stock market lately.

A few big firms changed their view on Friday after new data showed excess capacity at industrial plants had reached its highest level in 18 years in May. The U.S. economy has been mired in a period of very sluggish growth for nine months.

The Fed reported industrial capacity utilization fell to 77.4 percent, the lowest level since 1983. Also, the latest readings on inflation were benign in the view of economists.

``With capacity utilization at such low levels, any concerns about inflation are unfounded,'' Steinberg said.

The main gauge of U.S. inflation, the Consumer Price Index, rose 0.4 percent in May but just 0.1 percent excluding volatile food and energy prices, the Labor Department said on Friday. Easing inflation concerns gives the Fed scope to do a bigger rate cut if it believes one is warranted, economists said.

``Both corporate news and economic data have supported the notion that inflation fears were overblown and that the economy is weaker than Fed officials thought it would be,'' said Richard Berner, chief economist at Morgan Stanley.

``As a consequence, we think they will ease in June and leave the door open for further moves.'' Morgan Stanley changed its call to a quarter-point cut from no move.

Thirteen firms predicted the Fed would cut rates again at the August 21 FOMC meeting by a quarter point, unchanged from the prior poll. A few said there was even a chance of a cut in the relatively long period between June and August meetings.

``There's no evidence that they've done enough yet,'' said Jim Glassman, senior economist at J.P. Morgan Chase. ``The economy is still pretty stuck.'' J.P. Morgan predicted a half-point rate cut in the latest poll and the prior survey.

Bill Quan, an economist at Fuji Securities, said he was not changing his view that the Fed would cut rates by a quarter point this month.

``Any of the data we have gotten will come as no surprise to the Fed. They are indicating they are not opposed to doing a smaller rate cut and they have been transparent about what they want to do,'' Quan said.