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WASHINGTON (AP) - The Federal Reserve, which began the year aggressively fighting a severe credit crunch and economic weakness, may push the pause button after delivering perhaps one more quarter-point cut in interest rates.
Fed Chairman Ben Bernanke and his colleagues began their second day of discussions on Wednesday. Financial markets widely expected that those talks would end with an afternoon announcement that the Fed will cut a key interest rate by a quarter point.
That would be the seventh reduction in the federal funds rate since the central bank began battling against the credit squeeze and the growing possibility of a recession last September.
The Fed delivered two three-quarter-point moves and one half-point cut over an eight-week period from mid-January to mid-March that represented the central bank’s most aggressive rate cuts in a quarter-century.
However, the central bank is expected to respond with a less aggressive quarter-point move at this meeting, in part because the financial turmoil seems to have eased and because there are growing concerns about inflation.
While there is some thought that the Fed might decide to forgo a rate cut, most analysts believe that the greater likelihood is a quarter-point move.
“My best guess is that they want to buy a little more insurance against an economy that looks like it is in recession,” said Lyle Gramley, a former Fed board member with the Stanford Financial Group.
The overall economy eked out annual growth at a rate of 0.6 percent in the first three months of the year, the Commerce Department reported Wednesday, matching the anemic pace turned in during the final three months of last year. Analysts said they looked for the gross domestic product to drop into negative territory in the current April-June period.
A quarter-point cut would move the funds rate to 2 percent, more than 3 percentage points below the 5.25 percent funds rate in effect before Sept. 18, when the Fed started cutting rates.
A quarter-point move would trigger a similar reduction in banks’ prime lending rate, the benchmark for millions of consumer and business loans, which now stands at 5.25 percent.
The Fed’s rate-setting Federal Open Market Committee, composed of Fed board members in Washington and regional Fed bank presidents, is split into two camps. One group is concerned that the severe credit crisis and prolonged housing slump could be pushing the country into a deep recession while a smaller faction is worried that the Fed could be running the risk of letting inflation get out of control even as the economy slows.
Whatever the Fed does at the conclusion of this week’s meeting, private economists believe it will leave the door open for further rate cuts, seeking to avoid the mistake made at the October meeting when it sent a pause signal, only to have to backtrack.
“They made a big mistake after the October meeting, implying that they would pause, and then had egg all over their face when they had to begin cutting rates aggressively because the economy weakened more than they thought and the credit crisis turned out to be more severe,” said David Jones, head of DMJ Advisors, a private economic consulting firm.
While leaving the door open this time for further rate cuts if needed, the Fed may well be done, many analysts believe, if financial markets continue to improve and the economy starts to rebound with the help of the previous Fed rate cuts and 130 million economic stimulus payments, which started showing up in Americans’ bank accounts this week.
While many economists believe the country is in a recession, the expectation is that it will be a short one ending this summer. If that turns out to be correct, the Fed may hold rates steady for the rest of this year with the next move being a rate increase sometime next year when the economy is on sounder footing.
“The Fed won’t start raising interest rates until the unemployment rate has peaked and started coming back down,” said Mark Zandi, chief economist at Moody’s Economy.com. He said he was looking for the jobless rate, now at 5.1 percent, to climb to 6 percent early next year before starting to fall.

via AOL

WASHINGTON (AP) — Battling risky economic crosscurrents, the Federal Reserve is ready to bump down a key interest rate again to brace the wobbly economy. That rate cut could turn out to be the last one for a while as zooming energy and food prices heighten inflation concerns.

Fed Chairman Ben Bernanke and his colleagues are walking a tightrope. They are trying to shore up economic growth and at the same time they are mindful that they can’t let inflation get out of hand. It’s a bit of an economic dilemma: The very rate reductions the Fed depends on to energize the economy can also sow the seeds of inflation down the road.

“It’s a very challenging environment,” said John Silvia, chief economist at Wachovia.

In a nod to those conflicting forces, the Fed probably will opt for a moderate-sized rate reduction of one-quarter percentage point this week, Silvia and other economists predict.

At its previous meeting on March 18, the Fed slashed rates by a hefty three-quarters point. The action, however, drew opposition from two Fed members who favored a smaller reduction because of concerns about a potential inflation flare-up. It was a crack in the mostly unified front the Fed often shows the public.

The Fed, which has been cutting rates since last September, turned more forceful in January and March, when housing, credit and financial problems took a turn for the worse, threatening to plunge the country into a deep recession. The Fed’s rate cuts in January and March alone marked the most aggressive Fed intervention in a quarter-century.

This time around, though, the Fed is likely to go with a smaller rate cut at the end of its two-day meeting on Wednesday.

A quarter-point reduction would drop the Fed’s key rate for influencing national economic activity to 2%. This rate, called the federal funds rate, is what banks charge each other on overnight loans and affects a wide range of interest rates charged to people and businesses.

In turn, the prime lending rate for millions of consumers and businesses would fall by a corresponding amount, to 5%. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates would be the lowest since late 2004.

Economists think the Fed may be inclined to leave rates at such low levels possibly through the rest of this year and maybe into next year - as long as the country is not hit with another blow to economic growth.

“We are entering the stage where it is time for the Fed to wind down and move to the sidelines,” said Greg McBride, senior financial analyst at Bankrate.com. “A quarter-point reduction is a nice segue to that transition. Short-term interest rates could stay low longer than many currently expect,” he added.

The Fed’s rate cuts - which take months to work their way through the economy and affect activity - along with the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses - should help strengthen the economy in the second half of this year, Fed officials said.

It’s the first half of this year where damage from the housing, credit and financial debacles could be the worst. The economy may grow little, if at all, during this period and could actually shrink, Bernanke told Congress earlier this month. A recession, he said, was possible. It was Bernanke’s first public acknowledgment of such a scenario.

A growing number of economists now believe the economy probably will contract in the current April-to-June quarter. Many analysts also now think the economy will manage to eke out a barely noticeable 0.4% growth rate during the first three months of this year as opposed to falling into negative territory as some had previously thought. The government reports on the first quarter’s performance on Wednesday - the same day the Fed’s decides its next move on interest rates.

Even if the economy heals in the second half of this year and into 2009, the unemployment rate, now at 5.1%, is likely to rise, perhaps reaching close to 6% early next year, analysts said. Job losses for the first three months of this year neared the staggering quarter-million mark.

The Fed’s rate cuts ordered thus far would help to cushion the fallout.

On inflation, Bernanke said rising prices are a source of concern and must be monitored closely. Still, he is hopeful inflation will moderate in coming quarters.

Gasoline prices have shot up to record highs in recent days and could hit $4 a gallon this summer. Food prices are up 5.3% on an annualized basis in the first three months of this year, outpacing the 3.1% rise in overall inflation.

If the Fed does drop its key rate to 2% and holds it there for some time, that would still be low enough to provide relief to stressed homeowners facing a rate reset to their adjustable-rate mortgages, McBride said.

Trying to get the economy back to full throttle after its last recession in 2001, the Fed ratcheted down its key rate to 1% - the lowest in more than four decades. Then-chairman Alan Greenspan held the rate at that super-low level for a year, before the Fed began to bump it up. That action has since fueled criticism that Greenspan helped to create the very housing boom that has now gone bust, wreaking havoc on the economy. Foreclosures have surged to record highs, financial companies have wracked up multibillion losses and all the fallout has sent the economy reeling.

Even as economists predict the Fed is likely to wind down its rate-cutting campaign this year, they said the Fed would lower rates again if there were worrisome signs that the economy was faltering even more than expected.

“If the news is unremittingly bad, it will go down again. So the Fed has got plenty of ammunition if its needs it. But my guess is this will be about it,” said Bill Cheney, chief economist at John Hancock Financial Services. First Published: April 28, 2008: 4:40 AM EDT

via CNN

WASHINGTON - The Federal Reserve is expected to cut interest rates by a modest quarter percentage point on Wednesday and may suggest the rate-cutting cycle it kicked off last fall has reached an end.

The Fed will announce its decision on rates and offer an assessment of threats facing the economy at around 2:15 p.m. ET.

The statement … will make it clear that the net risk to growth is still to the downside, but that the risks have been reduced by the Fed s actions, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The central bank s decision may be shaped in part by a government report on U.S. gross domestic product released early Wednesday, which showed the bruised U.S. economy limped through the first quarter of this year at only a 0.6 percent growth rate as housing and credit problems forced people and businesses alike to hunker down.

The country s economic growth during January through March was the same as in the final three months of last year. The statistic did not meet what economists consider the classic definition of a recession, which is a retraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if modestly.

Fed policy-makers, who opened a two-day meeting on Tuesday, confront a bleak landscape with an economy moving sideways at best, elevated prices for food and fuel, a deep housing downturn and lingering malaise in financial markets.

The Fed has cut benchmark overnight rates to 2.25 percent from 5.25 percent since mid-September.

Of 20 primary dealers participating in a Reuters poll last week, all 20 said the Fed would cut its fed funds rate target for overnight bank loans by a quarter percentage point on Wednesday.

While a further quarter point reduction is widely expected, interest rate futures prices imply a small probability that rates will be held steady.

In addition to lowering rates to spur the economy, the central bank has rolled out a series of emergency steps to pump billions of dollars of liquidity into financial markets to beat back a credit crunch. Policy-makers also will debate a new liquidity tool paying interest on bank reserves on Wednesday.

Fresh evidence of clouds over the economy emerged on Tuesday, with reports showing consumer confidence at a five-year low this month, a continued slide in existing home prices in February and a 23 percent surge in foreclosures in the first quarter.

At the same time, with gasoline prices heading toward $4 a gallon and strong global demand pushing up food prices, some Fed officials have worried openly that a desire to support the economy could lead the central bank to take its eyes off inflation.

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Two officials dissented from the central bank’s decision in March to cut rates by three-quarters of a percentage point, preferring a less aggressive move.

The Fed’s rate cuts have led to a weakening in the U.S. dollar that has pushed import prices higher, adding to inflation pressures. But Fed officials believe unemployment is likely to climb amid the economy’s weakness, making it difficult for businesses to raise their prices.

Policy-makers also expect the combined effects of the central bank’s rate cuts which act with a lag and a $152 billion fiscal stimulus package will provide a boost to the economy in months to come.

The disinflationary effect of a weak domestic economy and rising slack will ultimately dominate the inflation boosting impact of higher commodity prices and dollar depreciation, UBS economist James O’Sullivan wrote earlier this week in a note to clients.

via MSN