A global credit squeeze has most economists convinced the Federal Reserve will come to the rescue and cut interest rates next month, a Reuters poll showed on Wednesday.
The survey of more than 100 economists across the U.S. and Europe taken Aug. 20 to Aug. 22 represents a 180-degree turn on risks to the economy -- and is as sudden as the violent moves in credit, currency and stock markets that triggered such a souring.
Median forecasts show they now expect the Fed to cut rates by 25 basis points by its Sept. 18 meeting to 5.0 percent and to follow with another, bringing them to 4.75 percent by year-end.
Forty-five of 63 say the Fed will trim the funds rate by Sept. 18, with six of those saying they will cut before and 18 saying they will stay on hold.
Thirty-four economists see a quarter percentage point of easing by then, nine say 50 basis points and two thought the funds rate will be 75 basis points lower by Sept 18.
Economists saw the European Central Bank holding rates at 4.0 percent on Sept .6 -- 34 of 65 were making that call, compared with only two of 65 just a few weeks ago, with medians showing 4.25 percent as the peak in rates.
However, the poll was taken before the ECB said on Wednesday that its rate policy stance was given by President Jean-Claude Trichet on Aug. 2. Then, he used the words "strong vigilance" -- well-known codewords for a rate rise the following month.
As for the Bank of England, hawkish bets that rates would climb to 6.0 percent, which had already dwindled to only a small majority before the recent market turmoil began, are now off the table and rates are seen on hold at 5.75 percent. Fifty of 53 see no move in U.K. rates in September.
Many economists are concerned, like the Fed, about the credit logjam's potential drag on the economy, although most are having difficulty quantifying it. Some have simply reverted to forecasts earlier this year which they had abandoned as it became clear the Fed had no intention of easing.
"Right now this is a liquidity problem," said Christopher Wiegand, economist at Citi in New York. "But it could evolve into a very conventional easing cycle."
Indeed, most say the Fed will cut sooner rather than later, as the potential threat to growth of a prolonged bottleneck in overleveraged credit markets is too large. Markets have bounced back on expectations the Fed will soon deliver.
Confidence Boost?
A cut would be a confidence boost to settle panicked markets, which are drawing comparisons with the 1998 crisis after Russia defaulted on its debt and a hedge fund, Long-Term Capital Management, nearly collapsed.
The Fed already cut its discount rate for direct loans to banks by 50 basis points on Friday. It has acknowledged it is ready to cut the funds rate as "downside risks to growth have increased appreciably."
But the Fed seems keen to use all options at its disposal and economists generally agree that if it is going to cut, it would prefer to wait until Sept. 18.
Many say that so long as falls in some asset prices remain orderly, there may not be a need for a cut by then.
"It looks like even after last week's horrendous action in the markets, there is policy appetite for an orderly correction in financial asset excesses. This does not guarantee a Fed funds rate cut in September," said Lena Komileva, G7 market economist at interdealer broker Tullet Prebon.
The Bank of Canada is no longer expected to hike at its meeting on Sept. 5 either, according to a separate Reuters poll of the Canadian primary dealers conducted on Tuesday.
Economists say the Bank of Japan will leave its overnight call rate unchanged at 0.50 percent on Thursday, also a dramatic change from just a few weeks ago when most Tokyo dealers thought policymakers would hike borrowing costs.
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