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Poll: U.S. Fed poised for rate cut
( 2003-06-22 12:14) (Agencies)

Wall Street's top bond dealers are dead certain the Federal Reserve is going to lower interest rates next week but they are completely flummoxed about the size of the cut.

A Reuters survey of the dealers who trade directly with the Fed showed a deep division over how aggressive the Fed will be. The poll found the camp expecting a half-percentage-point cut edging out those who see a smaller move by 12 to nine.

The Federal Reserve, which will hold a two-day policy meeting on Tuesday and Wednesday, is seen as set to lower the 1.25 percent federal funds rate for the 13th time since it started cutting rates aggressively in January 2001.

The source of the confusion is dueling articles by two respected Fed-watchers in rival newspapers: The Washington Post on Thursday forecast, without quoting sources, a half-point cut, while the Wall Street Journal on Friday cited Fed officials saying a quarter-point cut remains on the table.

Whether the conflicting reports reflect genuine debate among Fed officials about what they should do at next week's policy meeting or are an attempt to massage market expectations leading into the meeting is anybody's guess.

"I don't know what the hell these guys are thinking," said one economist who asked not to be quoted by name.

Others saw no shame in admitting to their confusion over the diverging newspaper reports.

"It's baffling, obviously, but we still think they'll go the full 50 (basis points)," said Stephen Stanley, senior market economist at RBC Greenwich Capital Markets.

"We suspect the Fed doesn't want the market to fully price in 50 because then the actual cut won't get much reaction -- less bang for the buck," he added.


The economy's stumbling recovery from the 2001 recession has led to more job losses than during the last "jobless recovery" of the early 1990s, and policy-makers hope another dose of lower interest rates will further feed consumers' appetite for houses and cars and keep the recovery afloat.

The Reuters survey, conducted on Friday, showed a definite shift over the past two weeks in expectations of a larger half-point cut. Twelve dealers now expect such a move, compared with eight in the previous survey conducted in early June.

This week, all the debate in financial markets has been on exactly how much "insurance" the Fed will want to take out. Fed Chairman Alan Greenspan said recently that in the face of sluggish growth, insurance is cheap compared with the cost of disappointing growth that could eventually lead to deflation.

"I expect that there will be an argument (over the size of a cut)," Michael Prell, an economic consultant and former Fed research director, told Reuters.

"I thought the market was going overboard in its interpretation of Fed statements when the center of gravity of expectations moved so far toward 50 basis points," he said.

The contradictory press reports of the Fed's supposed intentions have muddied the waters.

"We don't think it's an appropriate way for the Fed to adjust expectations," said Conrad de Quadros, economist at Bear Stearns.

Futures markets have reacted strongly to each report. On Thursday, the July fed funds futures contract jumped to price in a near 70 percent chance that rates will be cut by half a percentage point, to 0.75 percent.

On Friday, those odds retreated to 50-50. A move of a quarter-point is fully priced in and has been for weeks.

"(The reports) show there is some real debate within the Fed whether to go 25 or 50 (basis points)," said Lehman Brothers senior financial economist Drew Matus.

"My view on that is that fortune favors the bold. There is no point now, when you have so little ammunition left, to conserve any," Matus said.

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