With doubts surfacing anew about the sustainability of the economic recovery, an increasing number of Wall Street prognosticators say the Federal Reserve will be forced to cut interest rates again this year. The predictions, which have been coming out intermittently over the last several days, were behind part of Tuesday's 230-point Dow runup. The question investors must ponder, however, is whether the factors that led the market to even consider such a scenario will weigh more heavily than any potential cut will help. On Tuesday, Lehman Brothers economist Ethan Harris said he is placing 60% odds the Fed will reduce the funds rate, now at its lowest level in 40 years, in the next several months. His forecast follows Goldman Sachs' announcement Friday that it expects a 50- to 100-basis-point cut next quarter.
According to Harris, the Fed is likely to carry out a 25-basis-point cut in September, November, and December, pushing the Fed funds rate down to 1.0% -- which would be its lowest level since 1954. Harris added that he is not ruling out faster action, such as an inter-meeting move, or no action. Fed fund futures, a good proxy of policy, are putting 65% odds on a 25-basis-point cut in September.