Recession seen ending this quarter, double-dip unlikely

NEW YORK (Reuters) - The majority of big banks that do business directly with the Federal Reserve say the recession will end this quarter, and they see only a low risk that the economy will take another turn for the worse.

Seventeen out of the 18 dealers in the Fed's exclusive network of primary dealers that responded to a Reuters poll said the economy will see its first quarter of growth since 2007 in the third quarter of 2009.

The dealers on average see a 26 percent likelihood of a so-called "double-dip" recession, in which an economy plunges back into recession after a brief recovery. Views ranged from a 10 percent likelihood (Morgan Stanley, Goldman Sachs and RBS) to a 60 percent likelihood (Mizuho and Cantor Fitzgerald).

"Once the economy begins to recover, it tends to keep going in that direction, unless there is some other shock or other policy measure that brings it down. But we don't anticipate that happening this time," said Jay Feldman, economist at Credit Suisse.

On Wednesday, the Fed, the U.S. central bank, said the economy was leveling out after a ravaging recession that started in December 2007. But risks remain and the Fed reiterated its pledge to keep interest rates very low for an extended period.

In its battle against the worst financial crisis since the Great Depression, the Fed has cut interest rates to near zero and put in place a number of emergency lending programs.

Primary dealers don't expect the Fed to raise rates until 2010 at the earliest. Four banks expect the Fed to raise rates in the first half of 2010, seven say the second half of 2010. For the full results please see the table below.

"We are probably in store for a slow recovery, and in that kind of environment it makes sense to have a low funds rate for an extended period," said RBC Capital Markets' U.S. Economist Tom Porcelli.

The Fed also said it will have phased out its $300 billion Treasury purchase program by the end of October. The Fed has bought about 84 percent of the $300 billion so far, and reviews on the effectiveness of the program have been mixed.

The 10-year note's yield was 3.71 percent late on Wednesday, up from a five-decade low just above 2 percent at the end of 2008.

A year from now, in the third quarter of 2010, dealers see the benchmark 10-year Treasury note's yield at around 4 percent, according to the average forecast of the 17 primary dealers who answered that question.

This forecast suggests little concern that huge government debt issuance to pay for financial rescues, on course for $2 trillion this year alone, will ignite a major upsurge of inflation and send Treasury yields spiking higher.

The Fed on Wednesday reiterated that it expects inflation to remain subdued for some time.

(Reporting by John Parry, Chris Reese, Rachel Chang, Ellen Freilich and Richard Leong, writing by Kristina Cooke; Editing by Leslie Adler)