Sun, Mar 09, 2003 - Page 10 News List

JP Morgan, Merrill believe that the Fed will cut rates again

BLOOMBERG , NEW YORK

JP Morgan Chase & Co and Merrill Lynch & Co predicted the Federal Reserve will cut interest rates in two weeks, prompted by a government report showing the US economy lost 308,000 jobs in February.

The companies, two of the 22 firms that trade directly with the Fed, changed their forecasts after the Labor Department report showed the biggest monthly job loss since November 2001. They predict the Fed will cut its benchmark overnight bank lending rate by 1/4 percentage point instead of leaving it at 1.25 percent.

HSBC Securities yesterday became the first of the Fed's primary dealers to make the call.

"The economy is sliding down, not up,'' said Stan Shipley, senior economist at Merrill Lynch. He now predicts the Fed will cut rates by a quarter-point at both its March and May meetings.

Fed policy makers meet March 18, when they will also likely change their assessment to say weak growth is a greater risk to the economy than inflation, economists at the firms said.

The broad-based nature of the job losses, with seven of nine major industries shedding workers, improved chances the economy could slip back into recession, the economists said.

The Fed lowered its overnight bank lending rate to 1.25 percent, the lowest since 1961, in November. The central bank lowered the rate 11 times in 2001, when the economy was in recession. A 1 percent rate would be the lowest since July 1958.

Treasuries gained today on the jobs report, sending five-year note yields to the lowest in 48 years.

While notes rose for a ninth day in 10, stock indexes finished down for a second week on concerns about a US-led war against Iraq. The Standard & Poor's 500 Index lost 1.5 percent, while the Dow Jones Industrial Average declined 1.9 percent. The NASDAQ Composite index fell 2.4 percent.

A Fed rate cut at the March meeting could help financial markets by giving investors a push they hadn't been expecting, said James Glassman, JP Morgan's director of US economic research.

"This is what they did last November, when they surprised everybody with a 50 basis-point cut," Glassman said an interview with Bloomberg Television. "When rates are this low, the Fed needs to figure out how to get the biggest bang out of what limited options they have. The biggest bang is something that surprises the markets."

Traders in interest-rate futures are already betting the Fed will trim the average overnight rate, the federal funds rate, by 1/4 percentage point to 1 percent by May. The yield on the Chicago Board of Trade's fed-funds futures contract for that month fell to 1.08 percent, a record low.

"I suspect poor figures next week for retail sales and industrial production will intensify further the speculation of a March rate cut,'' said Ian Morris, HSBC's chief US economist.

JP Morgan's Glassman lowered his estimate for economic growth to a 1.5 percent annual rate from a 2.5 percent pace for the first half of the year. Shipley lowered his estimate for first-quarter growth to 1 percent from 1.5 percent, and for the second quarter to 1.8 percent from 3.5 percent.

Lehman Brothers Inc's chief US economist, Ethan Harris, said he may be inclined to revise his forecast for interest rates by the end of next week.

For now, he's calling for a 25 basis-point reduction at the May meeting. A basis point is 0.01 percentage point.

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