WASHINGTON: The US Federal Reserve looks set to deliver a small
interest rate cut on Wednesday to help an economy moving sideways at
best and could signal the move is the last in a cycle as officials eye
inflation warily. The Fed has already cut interest rates to 2.25
percent from 5.25 percent in six steps since mid-September in an
effort to keep US economic activity going in spite of a credit crunch
and a deep housing downturn.
Food, fuel and raw material prices are rising, boosting inflationary
pressures, a Fed report said recently. "This meeting's accompanying
statement poses a special challenge for the committee justify easing
another quarter point to avoid a deeper recession, and simultaneously
acknowledging the risk of commodity inflationary pressures," RBS
Greenwich Capital analysts David Ader and Ian Lyngen said in a
research note.
Interest-rate futures prices imply about an 80 percent probability of
a further quarter-point reduction and about a one-in-five chance of no
move at all when the Fed wraps up a two-day meeting on Wednesday. The
government reports on first-quarter US gross domestic product on
Wednesday.
Economists polled by Reuters expect the economy expanded at a sickly
0.2 percent annual rate, which would be the weakest since the closing
months of 2002. In addition to cuts in benchmark rates, the US central
bank has unleashed a series of emergency measures, sometimes in
coordination with other central banks around the world, to keep banks
and major financial firms lending and borrowing.
In a dramatic intervention last month, it stepped in to prevent the
failure of wounded investment bank Bear Stearns. With some signs
financial markets are stabilizing, Fed officials expect the combined
effects of rate cuts and a $152 billion government stimulus package to
revive the economy.
They are likely to discuss whether borrowing costs are appropriately
positioned to aid recovery without fostering inflation. Their
statement will provide clues to the tone of that debate.
Following are some factors Fed policy-makers will be considering on
Tuesday and Wednesday:
LIQUIDITY: Fed officials are worried about continued signs of strains
in short-term funding markets, as evidenced by elevated risk premiums
institutions are continuing to pay. Elevated spreads between the
London Interbank Offered Rate, a gauge of what banks charge each other
for loans, and overnight indexed swaps, a measure of anticipated
central bank interest rate targets, fuel those concerns. Policy-makers
have offered more than $400 billion in liquidity to banks and primary
dealers in Treasury securities, and suggest they are ready to bring
more liquidity measures to bear if necessary to restore normal market
functioning.
INFLATION: Fed officials are hearing from their contacts around the
country that food, fuel and raw material prices are rising and
contributing to inflationary pressures, the central bank's Beige Book
survey released on March 16 showed. Also, two members of the Fed's
interest-rate setting committee voted against the March decision to
cut rates by a sharp three-quarters of a percentage point, preferring
less aggressive action and citing the potential for higher inflation
-- and higher inflation expectations -- as a worry. But other Fed
officials believe that higher-than-desirable levels of inflation will
not persist as the slowing economy raises unemployment levels.
RECESSION WATCH: The economy is growing sluggishly and possibly even
contracting. Of most concern to policy-makers is evidence from
measures of confidence that the slowdown is driven by a retrenchment
in consumer spending, rather than in business investment. However, Fed
officials' chief concern is that growth could brake more than
expected. Gloomy consumer sentiment could feed a sharper slowdown and
persistently tight credit could neutralize the effect of Fed rate cuts
in providing a boost to economic activity. Finally, housing markets
remain very weak. But policy-makers expect those doldrums to lift over
the course of the year and look for housing to exert less of a drag on
economic growth in coming quarters.
Source : ET
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