Will Fed answer Wall Street's prayers?

Will Fed answer Wall Street's prayers?

NEW YORK (Reuters): Wall Street's leading firms were split Friday over whether the Federal Reserve will answer the markets' prayers for a three-quarter point cut in interest rates next week, a new Reuters poll showed.

In a survey of the 25 primary dealers of U.S. government securities, a paper-thin majority of 13-12 predicted the Federal Open Market Committee (FOMC) will lower the 5.5 percent federal funds rate on overnight bank lending to 5.0 percent on Tuesday while the rest saw an unusually large 0.75 point cut.

Initially, 14 had predicted a 0.50 point cut, and 11 had forecast a larger move, but one firm later shifted its view.

Stock investors who are clamoring for the bigger rate cut will be crushed if the Fed does not hear their pleas, and that will likely translate into further selling in an already depleted equities market.

"The markets will be disappointed if there is just a 50-basis- point cut on Tuesday," said Carol Stone, deputy chief economist at Nomura Securities International in New York. "If the Fed wants to stay up with this, they need to do 75. We would talk about 100 but the Fed might be afraid of signaling too much panic with 100."

Fed chairman Alan Greenspan last month said the economy had ground to a near standstill and the poll showed Wall Street firms have very modest expectations for growth this year.

The poll was conducted after the government released new data showing a sharp drop in industrial production in February and, separately, little inflation in wholesale prices.

Consumer sentiment unexpectedly edged up in the University of Michigan's preliminary March survey. But the data did not capture the full impact of a stock market sell-off this week, economists said.

Economists say a sharp drop in stock prices threatens to dent consumer confidence further and crimp consumer spending, which accounts for two-thirds of all U.S. economic activity.

Housing starts last month fell less than economists had expected, providing more evidence that the housing market is fairly robust despite the slowdown, data on Friday showed.

Until last week, markets were betting the Fed would slice another half point off rates in March, following two cuts in January that reduced the funds rate by a total of a full point to try to ward off recession.

In the last Reuters poll on Feb. 28, 23 of the 25 primary dealers forecast a 0.50 point cut in fed funds while two expected a 0.25 point reduction next week.

But expectations for a bigger rate cut shot up this week when deepening malaise over U.S. corporate profits and growing concerns about Japan's banks and fragile economy triggered a deep sell-off in U.S. and global stock markets.

The technology-dominated Nasdaq composite, which tracks nearly 4,700 stocks, is down more than 60 percent from its record high a year ago. It has fallen more than 20 percent so far this year and nearly 8.0 percent this week, ending on Friday at the lowest level since November 1998.

Blue-chip shares have fared better but the Dow Jones industrial average dipped below the 10,000 mark this week for the first time since October. It closed on Friday at a one-year low, down 7.7 percent for the week.

By Friday, fed funds futures which gauge market rate expectations, were showing about a 70 percent chance of a 0.75 point rate cut compared to only 15 percent a week earlier. " The market is putting a heavy challenge on Greenspan to do 75," said John Ryding, managing director and senior economist at Bear Stearns in New York. "It's the show-me FOMC."

The Fed's work to shore up the flagging economy will not be finished next week, dealers predicted. Of the 25, 11 expect another 0.50 point cut at or by the May 15 FOMC meeting while eight expect a 0.25 point cut at the meeting. Twenty-two dealers put the funds rate at 4.5 percent or less by mid-year.

Nomura, which had the most aggressive forecast for the immediate future, said it expected a 0.75 point cut next week, an 0.50 point reduction between the March and May Fed meetings and another 0.25 point cut at the May meeting.

"We began to understand this week that there is much more weakness in Japan and Europe is slowing down," said Nomura's Stone.

"The Fed will tell you those are not its primary concerns. But it's obvious from the industrial production data that weakness in other places is slowing demand for U.S. goods. There is a domestic impact to developments abroad," she said.

On average, the dealers predicted 0.6 percent growth on an annual basis in the January-March quarter, a 1.0 percent pace in the April-June quarter and 1.7 percent for the full year, fourth- quarter over fourth-quarter.

Two dealers are predicting a recession in the first half of the year, or two straight quarters of contraction.