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.