By James Langton

(January 19 – 16:40 ET) – Consensus seems to be shifting toward a 50 basis point rate cut at the next meeting of the U.S. Federal Reserve Board on January 31 and 31.

Merrill Lynch came out today strongly in favour of a 50 bps cut. “The preponderance of weak economic data, plus the developments in California not just the credit problems, but the slowing in the economy due to power outages, now lead us to think that the Fed will cut the funds and discount rates by 50 basis points at the next meeting.”

Merrill expects another 50 bps before mid-year. That would then take the funds rate to 5.0%.

Economists over at TD Bank agree with Merrill. “The Fed’s decision to move aggressively to cut rates 50 basis points between policy meetings earlier this month shows to what lengths the current Fed is prepared to go to instill confidence and avoid a recession. We expect this resolve to be demonstrated again at the January meeting.” They expect another drop in March of 25 bps.

“In addition to directly improving conditions on the consumer front, the lower borrowing costs should also provide support to equity markets,” says TD. “Meanwhile, the impact of the energy shock should begin to diminish once peak winter demand passes. As a result, key factors currently weighing on the U.S. expansion should lessen in the coming months, which sets the stage for a soft-landing and a stronger economy in the second half of the year.”

RBC DS Global Markets are joining the 50-bps camp too. “While we have not been in the recession camp and we are still not, we are making a slight adjustment to our Fed call from the view that the Fed would go 25 basis points on January 31 and then be finished. We now look for a half-point move at month’s end.”

RBC DS suggests this could make all the difference. “This small change boosts the likelihood that the economy will end this year on a stronger note. It also keeps intact our view that longer-term Treasury yields and equity prices will end the year higher than at the present.”