US Fed seen likely to cut rate again

29 October 2007 21:13  [Source: ICIS news]

WASHINGTON (ICIS news)--The US Federal Reserve Board is likely to cut its key federal funds interest rate by another 25 basis points this week, economists said on Monday, citing concern about the ripple effect of the ongoing housing slump.

 

“I suspect they may lower the rate again by 25 basis points,” said Kevin Swift, chief economist at the American Chemistry Council (ACC).

 

The Federal Reserve - the US central bank - is set to announce an interest rate decision on Wednesday this week. The Fed cut the rate on 18 September by 50 basis points (a half-point) to 4.75%, its first rate reduction since June 2003.

 

“Housing is still down and there is no end in sight to it,” Swift said of the continuing slump in the US housing sector. “Along with housing, consumer news is mixed, with a lot of different measures saying that consumer spending is slowing,” he added.

 

The home building industry - a key downstream consuming sector for chemicals and chemical products - has been in decline since late 2005.

 

Swift and other economists have been watching to see if falling fortunes in housing spread to other key sectors, such as consumer spending. “Retail sales appear to be flat with last year according to some indexes,” Swift noted.

 

A chill in consumer confidence is worrisome because consumer spending is the principal driving force of the US economy, accounting for as much as 70% of overall commercial activity.

 

Housing industry economists, including National Association of Home Builders (NAHB) chief economist David Seiders, believe the sector will recover by the second half next year but in the meantime will continue its downward slide into the first quarter of 2008.

 

Seiders said he expects the Fed will shave a quarter-point off the federal funds rate on Wednesday and follow with another 25 basis points reduction when the bank’s rate-setting committee meets again on 11 December.

 

David Huether, chief economist at the National Association of Manufacturers (NAM), also said he expects a quarter-point cut on Wednesday. “We think there is a greater than fifty-fifty chance for a 25 basis points cut, but no more,” Huether said.

 

Huether, whose trade group represents 14,000 member firms, holds that the Fed is not likely to drop the rate below 4.5% because inflationary pressures - the Fed’s longstanding principal concern - are likely to increase as the price of oil climbs ever closer to $100/bbl.

 

Don Norman, an economist with the Manufacturers Alliance, also expects a quarter-point drop on Wednesday, citing persistent worries about an infection of decline spreading from housing to the broader economy.

 

“The economy is facing a lot of hits, so I expect a quarter-point reduction,” Norman said. “I don’t think conditions are going to turn around anytime soon, and if this continues then I see another quarter-point cut in December.”

 

Gus Faucher, director of macroeconomics at Moodyseconomy.com, said his firm is expecting a 25 basis points cut.

 

“There are still some serious concerns, not just with housing mortgage credit quality,” Faucher said.  “A 25 basis points reduction would indicate that the Fed is going to be proactive and signal to markets that the central bank is still willing to act and is concerned about conditions out there.”

 

In addition, Fed Chairman Ben Bernanke said earlier this month that while there has been little evidence that the housing weakness will infect the broader economy, “further contraction in housing is likely to be a significant drag on growth in the current quarter and though early next year”. 

 

That statement, along with Treasury Secretary Henry Paulson’s comment that the housing decline is the most significant risk to the US economy, is seen as a strong hint that the Fed will cut its interest rate on Wednesday in hopes of stimulating business activity.

By: Joe Kamalick
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