Like many Wall Street insiders, Noel DeDora, managing director of
Fremont Investment Advisors
, is expecting the
Federal Reserve to cut the
prime interest rate by another 50 basis points Tuesday and possibly again in June.
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Then again, DeDora cautions, Fed Chairman
Alan Greenspan likes to surprise people and may not cut rates at all, in which case the market could be in for a wild ride. Even if that happens, though, DeDora predicts that Greenspan will make another intermeeting cut further down the line.
TSC: Do you expect a rate cut tomorrow, and if so, how much and why?
The greatest likelihood is what everybody else expects: 50 basis points. However, I don't put 100% odds on that. There's still a chance of 25, and there's always the remote possibility that they won't do anything. The reason I say that is the Fed has developed an interest in intermeeting cuts recently. They've done two, which is highly unusual. Also, Chairman Greenspan does have the option of waiting a couple of weeks and surprising us, which he seems to like to do.
Inflation has not reared its ugly head, and Greenspan has recognized this. Also, we have continued to get mixed signals on the economy, right into last week when the
confidence index was much higher than expected. The
Producer Price Index was pretty much in line. Retail sales came in stronger, but today I noticed that inventories, industrial production and capacity utilization were all a little bit weaker than expected. These are all reasons why the Fed could cut 50 basis points.
TSC: If we get this rate cut of 50 basis points tomorrow, could there be another rate cut in June?
I think there could be, although it might be 25. I do not think a rate cut tomorrow would rule out another rate cut in June. I feel they could still go a little further.
TSC: Many traders have said the market has priced in a cut. Do you agree, and if so, has the market priced in a 50 basis-point cut or a 25 basis-point cut?
the market has priced in a cut. But whether it's 50 points or 25 points, that's a little too exact to say. But I will say that if the rate cut is less than 50, there will probably be some disappointment. Twenty-five wouldn't be a disaster. We don't think 50 would be a bad thing, that it would have any inflationary dangers at all. But if we got nothing, it would be fairly disappointing, at least over the near term.
I really wish the market wouldn't look for cuts in the first place, but that seems to be the way it's behaving these days.
TSC: How effective do you think these cuts will be in improving the market? Is it more psychological than anything else?
Obviously, the immediate impact is psychological because there is a lag until when these cuts actually pull through to improve economic activity. But consumer psychology and general psychology are both very important. And we have had previous cuts that are starting to work their way through, and the ultimate impact, of course, is real.
In the final analysis, if the consumer doesn't buy it, nobody's going to make it, and it rolls right back up to the economy. So far, the consumer hasn't deserted us and has been hanging in there pretty strongly, and that's because even though unemployment has increased, it is still very low by historical standards.