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Mix-Ansicht- Fed Seen Cutting Rates But How Much? - YIHI, 18.03.2001, 16:45
Fed Seen Cutting Rates But How Much?
Fed Seen Cutting Rates But How Much?
By Barbara Hagenbaugh
WASHINGTON (Reuters) - It is a given the U.S. Federal Reserve will cut interest rates at a meeting on Tuesday but a toss-up whether it will make a deeper slash than the two half-percentage point trims made in January.
Analysts are split down the middle on the likely size of the Fed rate reduction as they weigh conflicting signs about the economy's health.
On the one hand, there is a raft of data showing nervous consumers, a dramatic slowing in the economy and a deeply depressed manufacturing sector coupled with badly savaged stock markets.
On the upside, consumers are still spending, the unemployment rate is at 4.2 percent, or just above a 30-year-low, and the housing market is strong.
In a Reuters poll taken on Friday, 13 of the 25 firms that are primary dealers of U.S. government securities said they expected the Fed's policy-setting Federal Open Market Committee to cut rates by a half-percentage point, while 12 predicted a more hefty -- and rare -- three-quarters point cut.
Responding to an abrupt cooling in the U.S. economy, the Fed cut rates twice in January by a half-percentage point each time, bringing short-term interest rates to 5.50 percent.
``I think they have to be a little concerned about a global financial meltdown,'' Schwab Washington Research Group managing director Greg Valliere said.
Valliere, and others who are on the three-quarters team, said the Fed needs to cut rates dramatically to send a signal that it is in the game and will do everything it can to fend off a painful recession. Plus, inflation has been well-contained, giving the Fed plenty of room to cut rates.
``I think it (a three-quarter point cut) might finally provide a signal to the markets that the Fed is no longer behind the curve,'' he said. ``There's a lot of anger among professional investors that the Fed has botched this.''
HITTING THE PANIC BUTTON?
But others note that cutting rates by three-quarters of a point, or 75 basis points in market lingo, would risk leaving the impression that Fed policymakers were panicked by the evident downturn. That could make matters worse.
``If they go 75 there will be some people who will be alarmed by that, who will think the economy is in worse condition than they thought it was,'' Economics from Washington, a consulting firm, President Douglas Lee said.
``The economic data over the past six weeks have actually been pretty good,'' he said. ``The Fed's primary job is not to manage the stock market. It's to manage the economy, and the stock market is really secondary to that.''
But some analysts note that with two half-point cuts in recent memory, the Fed needs to cut further.
``We think that 50 is just plain old vanilla,'' Karina Mayer, managing director at International Strategy and Investment Group, said.
If the Fed goes three-quarters, it would be the most aggressive cut in rates since Dec. 20, 1991, when the central bank reduced the discount rate -- which was then the Fed's primary monetary policy tool -- a full percentage point.
WATCH FED LANGUAGE
Mayer said if the Fed does not cut rates by three-quarters of a point it will include strong language in its post-meeting statement suggesting that it will likely cut rates again, potentially before its next scheduled meeting on May 15.
Stock market prices have taken a huge hit since the last Fed cut on January 31. The Dow Jones industrial average has lost more than nine percent of its value since the end of January while the Nasdaq has plunged more than 30 percent.
Consumer confidence, meanwhile, has also dropped, due in part to the decline in stock prices. More consumers hold stocks now than ever before and as stock prices drop, consumers see their wealth -- on paper anyway -- whittled away, restraining their ability to spend.
The University of Michigan reported on Friday that its index of consumer sentiment edged up slightly in March after three months of declines to historically low levels.
But the preliminary survey, which surprised analysts in light of a slew of company layoff announcements and other gloomy economic news, was largely completed last weekend and likely missed much of the gloom spread by this week's stock market sell-off, economists said.
Fed chairman Alan Greenspan has singled out confidence as the linchpin of the economy since consumer spending accounts for two-thirds of all U.S. economic activity. But he has noted that despite the drop in confidence, consumers have not stopped shopping.
The government reported last week that retail sales declined 0.2 percent in February, following a hefty 1.3 percent gain in the previous month. Taking the two months together and considering weather disturbances, economists note, the data suggests that spending remains strong.
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