Dealers unanimous on Fed March cut; sharper cuts seen

NEW YORK (Reuters) - Wall Street dealers unanimously expect the U.S. Federal Reserve to cut interest rates in March, a Reuters poll showed on Wednesday, but most now expect the federal funds rate to fall more sharply during the easing cycle than previously foreseen.

The median forecast for the low in the fed funds rate for the current easing cycle fell to 2.0 percent, according to the poll, down from 2.5 percent in the poll taken on February 1.

In addition, a majority of respondents now expect the Fed to cut the federal funds rate by 50 basis points on March 18.

In a poll conducted on February 1, all respondents expected the Fed to cut rates, but a majority saw a slimmer rate cut of 25 basis points from the Fed's March 18 meeting.

In the most recent poll conducted on Wednesday, February 27, 13 primary dealers predicted that the Fed would cut interest rates by a more aggressive half percentage point next month. Just two of the dealers who responded to the poll stood by a forecast for smaller quarter percentage point rate cut.

Five dealers did not respond to Wednesday's poll.

On Wednesday, Fed Chairman Ben Bernanke signaled a readiness to cut interest rates again to prevent further damage to the weak U.S. economy, even as he took note of rising inflation risks.

Delivering the Fed's semiannual report on the economy to Congress, Bernanke made clear the U.S. central bank was worried a deepening housing slump, softening jobs market and tighter credit could dim an already bleak economic outlook.

The testimony had little impact on markets as he largely reiterated the message that came from Fed Vice Chairman Donald Kohn on Tuesday and from the minutes of the January Federal Reserve Open Market Committee meeting released last week.

"With Bernanke testifying two weeks ago and Kohn speaking yesterday and the FOMC minutes coming out last week, a lot of (Bernanke's testimony today) was already digested by the market," said Jon Basile, economist at Credit Suisse. "And Bernanke left no sense that the easing will be taken back any time soon."

The poll also showed that a majority of dealers expect the Fed to cut interest rates again at its April 30 meeting, with most of those looking for a quarter-percentage-point cut and several expecting for a half-percentage-point cut.

The fed funds rate currently stands at 3.0 percent after the Fed slashed rates by a cumulative 125 basis points in January.