Futures traders and a growing number of economists are
now expecting just a quarter-point cut to interest
rates when Federal Reserve policymakers meet next
week, with forecasters saying improved sentiment in
financial markets has relieved pressure for a more
aggressive easing.
Barclays Capital late Tuesday said it had lowered its
forecast for a reduction in the federal funds target
rate to a quarter-percentage point cut, to 2%, "where
it will hold for the rest of the year". Previously,
Barclays had anticipated a half-point cut, to 1.75%
The current rate-cutting cycle has largely responded
to developments in the financial markets, and those
have improved since that last meeting, they said.
"There seems to be a sense in the market that perhaps
the worst is behind us," said Julia Coronado, senior
U.S. economist at Barclays Capital. There are still
pockets of stress on Wall Street and more fallout is
likely from the housing market, she cautioned. The
cost of borrowing between banks, as priced in Libor,
jumped last week.
Still, "there's a better sense of the magnitude of the
problem," Coronado said. Barclays anticipates the Fed
will start raising rates at its March 2009 meeting.
Wall Street's fear factor, the CBOE market volatility
index, has fallen to December levels
And an index tracking spreads on corporate
credit-default swaps, a type of tradable insurance
against the possibility a company will renege on its
debt, tumbled 40% from mid-March to the end of last
week. The credit spreads for some of Wall Street's
biggest institutions have dropped even more sharply.
"I suspect the cessation of rate cuts is near at hand.
The Fed will likely pull the trigger on another 0.25%
and not 0.5% as was initially expected at the next
FOMC meeting, and send a signal that they intend to
pause soon."
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