Following disappointing economic data, analysts are uncertain whether the US Federal Open Market Com...
Following disappointing economic data, analysts are uncertain whether the US Federal Open Market Committee (FOMC) will again ease monetary policy at its penultimate 2002 meeting on Wednesday this week.
The Fed Funds rate has remained at 1.75% since December 2001, when the FOMC made the last in a series of 11 rate cuts that wiped 4.25 percentage points off official interest rates in the space of a year, taking them to their lowest level since 1961.
The futures market is pricing in a strong chance of a further 25 basis point easing before the end of the year. Meanwhile, data showing a softening in retail sales and factory activity, stagnant labour markets and consumer confidence at levels last seen in the early 1990s has prompted some to anticipate the FOMC will choose November to make the cut.
Minutes from the last policy meeting on 24 September showed that two FOMC members urged Fed chairman Alan Greenspan to cut rates to boost growth, and recent speeches by Fed officials suggest they are concerned the economy has stalled over the past two months.
But despite suggestions that the extended outlook for economic growth remains weak, most officials have been largely supportive of the current setting of monetary policy. Fed governor Ben Bernanke earlier this month blamed uncertainty over global events for a lack of economic improvement, while indicating he was comfortable with the current setting of monetary policy. 'The recovery is proceeding, but it is not as strong as we hoped or possibly expected,' he said.
Meanwhile, Greenspan has used a recent public forum to praise the high productivity rates in the US, with no bearish remarks to indicate further easing is on the cards.
Newton global fixed interest team leader Stewart Cowley said the FOMC's decision this week is not as important to the market as the statements that will accompany it, which will dictate the tone and direction of the market.
However, he does expect market reaction to the decision to give some trading opportunities.
'If they don't cut rates and bonds fall, the market is speculating that the economy is going to recover soon, which is quite wrong and basically an opportunity to buy on dips,' he says.
Gartmore global bond fund manager Bob Jolly says that on balance the FOMC is unlikely to cut rates, but says he would not be overly surprised at a cut. But with interest rates already at such low levels, bonds are unattractively expensive, he adds. 'If you can buy equity with a yield similar to that on a bond from the same firm, it is hard to argue in favour of the bond, which only gives you back your principal instead of unlimited upside,' he says. 'Unless you believe equity dividends are going to be slashed, equities in some sectors look cheap compared with bonds. Even if equities are at fair value, if they are yielding more than bonds, that shows that bonds are very expensive.'
Jolly says it is entirely plausible that another round of corporate cost-cutting could lead to higher unemployment and from there to a fall in consumer spending and a double-dip recession. 'In that case, why bother wasting 25 basis points in easing here, when the economy is bumbling along the bottom, but may not yet have hit a brick wall?' he said.
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Opportunity to buy on dips if no rate cut.
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