Wall Street firms see Fed cutting at least 75 bps

By Richard Leong

NEW YORK (Reuters) - Nearly all U.S. primary dealers now believe in the wake of Bear Stearns' near collapse that the Federal Reserve will cut key short-term rates by at least three-quarters of a percentage point on Tuesday.

Earlier this month, they had believed a half-point cut would suffice to help keep the economy from spiraling into a recession.

Seven of the 20 Wall Street firms, which do business directly with the Fed, predict that the U.S. central bank will lower its target rate on federal funds by a full point to 2.00 percent from 3.00 percent. If that happens, it would be the first time in more than 25 years since the Fed made such a steep rate cut.

The bond dealers forecasting such a bold rate cut include Banc of America Securities, Citigroup, Deutsche Bank, Goldman Sachs, HSBC Securities and UBS Securities.

Heightened jitters from the liquidity crisis at Bear Stearns -- whose own economists are looking for a full-point cut -- have raised expectations for the Fed to aggressively reduce interest rates to complement the array of inventive moves to combat a corrosive global credit crunch.

"It's hard to predict when the Fed will stop cutting rates until the financial market stabilizes," said Jonathan Basile, economist at Credit Suisse in New York on Tuesday.

The Federal Open Market Committee, the Fed's rate-setting group, is expected to announce its rate decision and issue a policy statement at about 2:15 p.m..

A majority of primary dealers expected the Fed to lower the benchmark rate by three-quarters of a point to 2.25 percent. Some of them said they are not ruling out a full-point cut.

The Fed's rate-setting committee "may want to impress markets with the seriousness of its intent to stabilize the financial market situation by using the tools at its disposal to the fullest reasonable extent," Kevin Logan, senior U.S. economist at Dresdner Kleinwort, wrote in a research report on Tuesday.

In a Reuters poll conducted in early March, only four of 16 dealers surveyed forecast a 75 basis-point cut from the Fed at its meeting this month. The rest predicted only a 50- basis-point rate cut.

As of Tuesday, Barclays Capital was the sole Wall Street firm predicting a rate cut of only 50 basis points.

Traders, meanwhile, had been looking for even bigger rate cuts than analysts due to the credit turmoil.

But the markets have now ruled out the "nuclear option" of a 125-basis-point rate cut that some had expected earlier in the session. A slash of that magnitude -- no longer seen as an option -- would take the fed funds rate target down to 1.75 percent.

U.S. interest-rate futures at midday on Tuesday showed an 88 percent chance of a 1-percentage-point, or 100-basis-point, cut, leaving only a 12 percent chance for a three-quarters of a point, or 75-basis-point, reduction.

(Additional reporting by Ros Krasny)

(Reporting by Richard Leong; Editing by Jan Paschal)