Fed signals pause, not end, to rate cuts

NEW YORK (Reuters) - For the first time since the credit crisis began last summer, Wall Street does not expect the Federal Reserve to cut interest rates at its next meeting, according to a Reuters poll of major dealers on Wednesday.

However, in a sign of continued fears of recession, the Fed could still ease monetary policy after that, and respondents in the survey were split when asked whether the U.S. central bank was done cutting rates altogether.

The Federal Reserve lowered its benchmark interest rate by a modest quarter percentage point to 2 percent on Wednesday and hinted the move could be the last in a series dating to mid-September.

In announcing the decision, the U.S. central bank pointed to the "substantial" reductions it has already put in place and noted that energy and other commodity prices were on the rise, a reference to inflation concerns.

Since the credit crisis erupted late last year, the Fed has slashed the target for the overnight federal funds rate by 3.25 percentage points, and investors see the central bank eager to assess the effects of the aggressive monetary easing to date.

In its statement, the Fed also dropped a reference contained in its last interest-rate announcement that "downside risks to growth remain."

"They certainly tweaked it a little bit to suggest that they would like to at least pause after this meeting, but not especially forcefully so there is certainly no promise," said Jim O'Sullivan, economist at UBS in Stamford, Connecticut. "In the end it still comes down to the data and the markets."

In the survey, 17 out of 19 primary dealers said the Fed would leave interest rates unchanged when it meets next, on June 24-25. Two expect a quarter-point cut.

However, when asked whether the central bank was done cutting, eight said yes and 10 said no, reflecting the considerable uncertainty over the prospects for U.S. economic growth, which nearly ground to a halt at the start of the year.

A build-up in inventories kept the U.S. economy afloat in the first quarter despite the weakest consumer spending since 2001 and reduced business investment, a government report showed on Wednesday.

Gross domestic product grew at a 0.6 percent annual rate in the first quarter, matching the fourth quarter's advance and topping forecasts for 0.2 percent growth.

However, it did not end a debate on whether the country was sliding into recession, even though the Fed expressed concern over inflation and softened some of its dour language on the economy.

"I still think their No. 1 concern is growth even though it is not clear from the statement," said Drew Matus, senior financial economist at Lehman Brothers in New York.

"I think they signaled a pause, and if I read this in a complete vacuum I would say it was probably a neutral policy bias, although I don't think that is the actual way of the world."

When asked what was the Fed's main concern, 13 said growth, none answered inflation and three saw it as balanced between the two factors.

Based on the poll, this could lead to additional monetary easing. The results of the survey showed four expected a quarter point cut at the Fed's August 5 meeting, while 13 forecast no move.

Dealers' median forecast for the year-end federal funds rate was 1.75 percent, indicating one more quarter-percentage-point rate reduction in 2008.

In the financial markets, traders were also guessing that the Fed had not shut the door to another interest rate cut in June, but most bet that Wednesday's quarter-point cut could be the last for a while.

Interest rate futures, which measure market sentiment toward Fed policy, jumped after the FOMC meeting but still show only a 24 percent chance for a June ease.

When What is

will Fed's No.1

Fed Concern

Fed Fed Is Fed FF Rate Start Now,

Action Action done at End Raising Growth or

June 25 Aug 5 cutting? of 2008 Rates? Inflation? ------------------------------------------------------------------------------- Banc of America No Move Cut 25 No 1.50 June 2009 Growth Barclays No Move No Move Yes 2.00 March 2009 Balanced Bear No Move No Move No 1.75 H2 2009 Growth BNP Paribas No Move No Move No 1.00 - Growth Cantor Fitzgerald No Move Cut 25 No 1.50 End 2009 Growth Citigroup No Move - No 1.50 - - Countrywide Fin No Move No Move Yes 2.00 End 2009 Balanced Credit Suisse No Move No Move Yes 2.00 - Growth Daiwa Securities N/A Deutsche Bank Cut 25 - No 1.50 - - Dresdner No Move No Move Yes 2.00 Q3 2009 Growth Goldman, Sachs No Move No Move Yes 2.00 2010 Growth HSBC Securities No Move No Move No 1.50 2010 Balanced J.P. Morgan No Move No Move Yes 2.00 Q1 2009 Growth Lehman Brothers No Move No Move No 1.25 - Growth Merrill Lynch No Move Cut 25 No 1.00 Q1 2009 Growth Mizuho Securities No Move No Move Yes 2.00 Q2 2009 Growth Morgan Stanley No Move No Move - 2.00 - - RBS Greenwich No Move No Move Yes 2.00 Q2 2009 Growth UBS Securities Cut 25 Cut 25 No 1.50 H2 2009 Growth (Additional reporting by Ellen Freilich, Gertrude Chavez-Dreyfuss, Chris Reese, Richard Leong, John Parry, Nick Olivari; Editing by Leslie Adler)