NEW YORK Most of the Wall Street firms surveyed by Bloomberg News that trade directly with the Federal Reserve say they expect the central bank to reduce the federal funds rate another half percentage point next month.
Such an action would be the fifth of its kind this year and would move the target rate for overnight loans between banks, currently at 4.5%, to its lowest level in seven years.
The central banks Federal Open Market Committee, which sets monetary policy, is next scheduled to meet May 15.
Fifteen of the 25 trading companies contacted by Bloomberg said they expect the federal funds rate to be 4% after that meeting. Nine companies said a quarter-point rate cut is more likely, and Barclays Capital forecast no change in the rate.
The Fed hasnt been shy about cutting rates, said Michael Cloherty, a fixed-income strategist at Credit Suisse First Boston, one of the companies expecting a half-point cut. Its premature to assume that it will take smaller steps, given that we still dont know if consumer spending, which has held up remarkably well, will slacken.
Including the surprise move last Wednesday, the Fed has cut the federal funds rate by two percentage points this year. It had not cut the rate that quickly since 1982, according to the Federal Reserve Bank of New Yorks Web site.
A dozen of the securities companies in the survey said they expect the Feds last rate cut of this year to occur at its June 26-27 meeting. Fourteen forecast the rate will be 4% by then, and four said it will fall to 3.5%.
This years Fed cuts will succeed in creating an energetic rebound in the fourth quarter and allow us to avoid a recession, said Dana Johnson, head of research at Banc One Capital Markets Inc. in Chicago. The company was the only one predicting that the central bank would cut the rate to 4%, then raise it again by yearend, to 4.5%.
Theres nothing wrong with knowingly pushing interest rates to a level that, ultimately, will have to be reversed because with an economic recovery comes the potential for rising inflation, he said.