Analysts change tune on rates

Twenty-two of the 24 economists at Wall Street's biggest bond dealers expect the Federal Reserve to leave interest rates unchanged when policy makers meet next week. A week ago, just three said so.

Merrill Lynch & Co's Bruce Steinberg, JP Morgan Chase & Co's James Glassman and 17 other economists who anticipated a quarter point cut in rates switched their forecast after Fed Chairman Alan Greenspan signalled the economy may soon rebound.

The Fed chairman said "pretty much point blank we've seen enough signs of stability," said Robert DiClemente, an economist at Salomon Smith Barney Inc, who was among the economists who changed their minds at the primary dealers, firms that trade directly with the Fed.

A decision to leave overnight rates at 1.75 percent would be the first time since December 2000 the Fed didn't cut its target at a policy meeting. The Fed lowered the rate 11 times last year to a 40-year low to help pull the economy out of recession.

Greenspan's to Con-gress yesterday sparked the change in consensus. He said falling business inventories may produce a ``significant'' boost to income and spending, quickening the economy's rebound. A pickup in growth makes more rate reductions unnecessary, economists concluded.

The Fed chairman's comments yesterday contrasted with remarks that Greenspan made in a speech on Jan. 11 in which he said the economy faced "significant risks." Economists pointed to that comment as evidence the Fed would likely make additional rate reductions. Some traders placed bets last week that the Fed wouldn't lower rates at its meeting that begins Jan. 29. By switching forecasts, the economists are catching up with the traders.

Federal futures, the interest rate-futures market's closest gauge to rate expectations, are showing an 8 percent chance that rates will be cut, down from 40 percent last week.

The expectation that the Fed will stop lowering rates has prompted investors to drive up yields during the last two weeks.

The yield on the benchmark 10-year Treasury note has risen 23 basis points to 5.07 percent over the past seven sessions. That yield is 13 basis points below a six-month high. A basis point equals 0.01 percentage point.

Some said Greenspan may have changed his outlook because of signs in the last two weeks that the economy is recovering. Initial filings for jobless claims fell last week to the lowest level in half a year while a consumer sentiment gauge rose to its highest level in a year and a factory report showed manufacturing may emerge soon from an 18-month contraction.

Unless Greenspan has "been misinterpreted again," there'll be no change in rates, said John Ryding, chief market economist at Bear Stearns & Co. "You can't rule out further cuts this year, but once they stop, it'll be hard to start again."

Many say once policy makers stop cutting, their next move will be to raise rates. Henry Willmore of Barclay's Capital and Banc of America Securities' Peter Kretzmer forecast the Fed will begin raising the overnight rate in the second quarter of the year to prevent the recovery from fueling an inflation surge.