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Fed will cut rates by 50pts this month, says Goldman

Slowing economy will prompt aggressive move, it says

(WASHINGTON) Goldman Sachs Group, one of the 20 primary dealers that trade directly with the Federal Reserve, said the central bank will reduce its target rate by half a percentage point to 3.75 per cent on or before Jan 30.

The securities firm still projects a cut of 75 basis points, or three-quarters of a percentage point, by the end of the first quarter. On Friday, Goldman said 50 basis points of that will come this month as the deteriorating economy prompts the Fed to act more aggressively.

‘The information has been sufficiently negative that we think they need to cut by 50’ basis points, said Jan Hatzius, chief US economist at Goldman in New York. ‘There is a possibility of a move before the meeting. I think the more likely outcome is they will wait until the meeting, but I do think they will be doing 50’ basis points.

Consumer spending would have to drop unexpectedly for the Fed to cut rates before the next scheduled meeting on Jan 29-30, the firm said in a note on Friday.

Payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, the Labor Department said on Friday in Washington. The jobless rate rose to 5 per cent in December, the highest in two years, fuelling concern the economy may be slipping into recession.

A slowing economy in 2008 points to a ‘more benign’ outlook for inflation, giving the Fed room to lower rates, Mr Hatzius said.

Barclays Capital also revised its forecast for January and now expects a 50 basis point cut, said Michael Pond, a New York-based interest rate strategist at the firm. Barclays is another of the 20 primary securities dealers that trade with the Fed. 

 

Source: Bloomberg (Business Times 7 Jan 08)

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