Wall Street Banks Expect Bigger Rate Cuts From Fed
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Wall Street banks have ratcheted up again the amount of Federal Reserve easing they expect in coming months, with the central bank now seen cutting rates at each of its three remaining 2007 meetings.
Amid a sharp crunch in credit markets and following Friday’s negative August non-farm payrolls report, economists are almost unanimous in seeing a rate cut at the upcoming September 18 Federal Open Market Committee, with six of the dealer banks surveyed calling for a cut of as much as 50 basis points.
A Dow Jones Newswires/CNBC survey of all of the 21 primary dealers — those who deal directly with the Fed and underwrite Treasury auctions — found that the median expectation was for the central bank to cut to 5% in September, ease to 4.75% in October, and lower the rate to 4.5% by the end of the year.
The only dealer that did not expect a September rate cut was Cantor Fitzgerald.
The survey was conducted Friday after the Labor Department reported that payrolls declined 4,000 in August, the first negative reading in four years. The Fed has kept rates steady at 5.25% for the last nine meetings. As recently as its August meeting, the Fed said inflation remained its “predominant” concern.
However, policymakers switched tack a few days later, reacting to the mounting strains in credit markets by cutting the discount rate and issuing a statement declaring that “the downside risks to growth have increased appreciably.”
Friday’s survey results mark the latest shift in economists’s forecasts over the last few weeks. In the most recent survey on August 20, economists expected one rate cut in September and another in December. At the prior survey on August 3, dealers saw a 5.25% year-end rate.
Since August 20, two thirds of the banks surveyed have changed their call to see more easing. Several, including Credit Suisse, Deutsche Bank, and Barclays Capital went from forecasting no change by year-end to predicting rate cuts in at least two of the next three meetings.
While banks now see rate cuts as far more likely in coming months, many of them also believe that the easing will not continue into 2008.
The median expectation of economists is for the fed funds target rate to stand at 4.5% by the end of June 2008, in other words unchanged from the year-end forecast.
