FED'S POLICY EASE MAY END WITH 2ND QTR RATE CUT
The Federal Reserve's move to easier
monetary policy, begun with four quick half-point discount rate
cuts in 1986, will likely end with a final rate drop in the
second quarter, analysts said.
    A poll of 10 economists shows most expect interest rates to
edge lower, with the Fed likely to drop its basic lending rate
from 5-1/2 pct late next quarter to help the economy.
    "The Fed is not likely to ease policy much further without
a full-blown recession," said Raymond Stone, chief financial
economist at Merrill Lynch Capital Markets.
    Stone said economic data available by late June may be just
weak enough to prompt one more discount rate cut. But he said
it may only be a quarter-point drop instead of the usual half
point, to avoid hurting the dollar further.
    All of the economists agreed that the Federal Open Market
Committee tomorrow will leave Fed policy unchanged.
    The average forecast of those surveyed projects roughly
quarter-point drops by the end of June in both the Treasury
bond yield, to 7-1/2 pct, and the Federal funds rate at which
banks lend to one another, to 5-7/8 pct. Most expect the prime
lending rate at major banks to remain at 7-1/2 pct.
    Other broad predictions of the survey, relating mainly to
the April-June quarter, follow:
    - The dollar is likely to decline five to 10 pct further
against other major currencies because of a large U.S. budget
deficit and a wide, but narrowing, trade gap. Contacted after
the dollar's steep drop in the last two business days, the
economists reaffirmed this view but stressed the risk is that
the dollar will fall more, rather than less, than they expect.
    - Oil prices in the second quarter are likely to continue
trading roughly between 16 and 19 dlrs a barrel and could well
test the lower end of that range.
    - Stocks will continue to outperform bonds next quarter and
probably for all of 1987. Stocks should gain on strong
foreign demand and a modest second-half economic rise. The
outlook for bonds also is less favorable later in the year
since both inflation and interest rates may be edging up.
    - Inflation as measured by the GNP implicit price deflator
will rise to around 3.3 pct this year from 2.7 pct in 1986. The
sharp fall in the dollar to date will add to inflation, as will
a mild economic pickup in the second half of this year.
    - U.S. real gross national product, which grew at a two pct
annual rate in the 1986 second half, should expand at
respective rates of about 2.3 pct and 2.5 pct in the 1987 first
and second halves. First-quarter growth is put at a 2.4 pct
annual
rate, slowing to 2.1 pct next quarter.
    Robert Brusca of Nikko Securities Co International sees
both the strongest economy and the highest interest rates among
those surveyed. He expects real GNP, which grew at a 1.1 pct
rate in fourth-quarter 1986, to expand at a 3.3 pct rate this
quarter and 3.5 pct next quarter.
    "The economy will bounce back more strongly than many
expect," Brusca said. He said an involuntary buildup in
inventories, largely in autos, will add to first-quarter
economic growth, with consumer spending helping later.
    "We're running out of special factors to keep the economy
afloat," said Philip Braverman of Irving Securities Corp. His
interest rate and economic forecasts were among the lowest.
    Braverman said tax law changes and inventory accumulation
helped lift fourth and first quarter GNP growth, respectively.
He expects 2.5 pct first quarter growth but said that second
quarter growth could be zero or negative.
    Braverman said economic activity next quarter will suffer
from a paring of inventories, lower capital investment, slow 
government spending and less construction. Only a marginally
narrower trade deficit will add to growth.
    He sees a 7.10 pct end-of-June yield on Treasury bonds,
with Federal funds and prime rates at 5.50 and seven pct,
respectively. Nikko's Brusca projects rates of 8.25 pct for
bonds, 6.15 pct for funds and 7.75 pct for the prime rate.
    Two of the 10 economists revised rate forecasts up mildly
after the dollar's fall to 40-year lows versus the yen in past
days and news of pending U.S. trade sanctions against Japan.
    David Resler of Nomura Securities Co International Inc
raised his end-June bond yield forecast to 7.50 pct from 7.20
pct and a Fed funds rate estimate to six pct from 5.80 pct.
    Raul Nicho, president of Money Market Services Inc, lifted
his forecast of bond and Fed funds rates an eighth of a point
to eight pct for bonds and 6-1/4 pct for funds. Both Nicho and
Resler left their end-June prime rate forecast at 7-1/2 pct.
    The higher rate forecasts reflected a belief that Japanese
investors will be less eager to buy U.S. bonds because of fear
about further dollar erosion and perhaps in response to U.S.
trade sanctions. Yields may have to rise to lure other buyers.
......END-JUNE U.S. INTEREST RATE FORECASTS....
....................T-bonds..Fed funds..Prime..
Nikko Securities.....8.25......6.15......7.75..
Money Mkt Services...8.00......6.25......7.50..
Discount Corp........7.75......6.25......7.50..
Merrill Lynch........7.30......5.75......7.50..
Bankers Trust........7.25......5.50......7.50..
Wells Fargo Bank.....7.30......5.60......7.00..
Irving Securities....7.10......5.50......7.00..
Dean Witter..........7.00......5.50......7.00..
.FORECAST AVERAGE....7.50......5.875.....7.50..
.CURRENT LEVELS......7.80......6.125.....7.50..
 Reuter
