...that's not what the Fed watchers at Merrill Lynch expect. They, in fact, raise the possibility of a major market disappointment in view of the Street's widespread expectation of a rate reduction this month.
Given the lack of urgency to initiate a rate reduction, as exemplified in a Fed press release that followed the Dec. 19 FOMC meeting, Merrill's economics team feels the Fed could bide its time till the March 20 FOMC meeting before reducing rates.
This revelation comes from David Rosenberg, Merrill's chief Canadian economist and strategist, who says the Fed, judging from what the firm's U.S. Fed watchers think, "could well remain stingy with liquidity for another three months."
Sources, however, are dubious. They suggest if this were to happen-that if January went by and there was no Fed rate cut-the stock market could get beaten up pretty badly. What's more, it's felt, Fed inaction could lay the groundwork for a nasty recession.
"No rate cut and you're easily talking about a 9000 Dow," says one money manager at Neuberger & Berman. (The Dow is currently trading at 10707.15).
Although Rosenberg raises the possibility that the Fed could forego a lowering of rates longer than most of us expect, he nonetheless feels easing is clearly justified sooner than later. His chief reasons:
--The wealth effect has been obliterated. For example, the decline in the broad-based Wilshire Index has wiped out nearly $2 trillion in paper wealth, in turn cooling U.S. consumer spending to its most sluggish performance in nearly three years.
--Oil prices have dropped sharply, alleviating possible concerns over inflation expectations.
--The Fed Funds futures contract, which has a near-perfect record in leading the Fed, is close to discounting a 50-basis-point cut by the end of the first quarter.
--The labor market is slackening, with jobless claims at a 2 1/2-year high.
--Cyclical inflation and growth indicators have peaked, such as pipeline measures of core wholesale inflation and industry operating rates.
Albert Gross, chief economist of Refco. Inc., a large government securities dealer, rejects the notion that the Fed might lower interest rates by 50 basis points at this month's FOMC meeting. (He expects 25-point reduction).
Based on the tempo of the economy, he feels expectations of a 50 basis-point cut are unwarranted.
"The economy is slowing, but it isn't going to pot," says Gross, who expects GDP growth of 1%-2% in 2000's fourth quarter, followed by another 2% gain in the current quarter.
He also points out that while this year's holiday retail sales were slower than they were a year ago, they were still positive for the period.
"Greenspan's hallmark are increases of 25 basis points and that's what I expect we'll continue to see," he says.
Gross, though, does hedge somewhat, pointing out a significant financial failure could change the rules of the game.
As for the bond market, Gross rates it overvalued. He strongly doubts there will be any Fed inter-meeting to raise rates, as some pros are predicting. As such, he says he would be a seller, not a buyer, of bonds, which he contends are sporting excessive prices based on overly-optimistic expectations.