US Fed expected to cut rates by quarter-point

29 April 2008 20:39  [Source: ICIS news]

WASHINGTON (ICIS news)--The US central bank is likely to shave its key interest rate tomorrow by another quarter-point, economists said on Tuesday, but some argued the Federal Reserve Board may well call a halt to rate cuts for now to thwart inflation.

 

“It looks like a high probability that the Fed will cut its federal funds rate by a quarter-point - but with wording to suggest that they are then going to pause and not make any further rate reductions for a while,” said David Seiders, chief economist at the National Association of Home Builders (NAHB).

 

Seiders said the board governors are probably getting increasingly worried about inflation and the inflationary impact of continuing interest rate cuts.

 

“The Fed doesn’t want to encourage the dollar to keep falling, which rate cuts will do,” Seiders said, noting that the continuing slide in the value of the US dollar has in part influenced the steady climb in the price of oil.

 

Don Norman, economist at the Manufacturers Alliance, said he thinks the Fed will opt for a half-point rate reduction, a cut of 50 basis points, “given the collapse of the housing market, the level of consumer indebtedness, rising unemployment and concerns about the financial sector”.

 

However, Norman said it would be better for the central bank to hold the line on further reductions for now.  “The rate reductions to date have been substantial and further cuts will only fuel inflationary pressures,” he said, adding:  “Once inflation takes hold, it is difficult and costly to eliminate.”

 

The prospect for runaway inflation also worries Paul Bishop, managing director of research at the National Association of Realtors (NAR), who said he also expected a quarter-point cut from the Fed on Wednesday.

 

“The more immediate concern is the state of the US economy and the risk of recession, so the Fed will act to forestall that with another cut of 25 basis points,” Bishop said.

 

“But there are also strong indications that this will be the Fed’s last rate cut for a while, to ensure that the dollar is not dragged down still further,” he added.  Further sharp declines in the value of the dollar would spark inflationary pressures, Bishop said.

 

“If inflation gets out of the bottle, that is harder to reverse than an economic decline,” he said.

 

Kevin Swift, chief economist at the American Chemistry Council (ACC), said he sided with what appeared to be a consensus on Wall Street that the Fed will cut its rate by a quarter-point.

 

“There is another school of thought that says the Fed will hold interest rates steady now, but that is probably just wishful thinking among strong-dollar advocates,” Swift said.

 

Gus Faucher, director of macroeconomics at Moodyseconomy.com, said he too expected a cut of 25 basis points and that the Fed governors will indicate that they are near or at the end of their policy of loosening credit.

 

“They’re becoming increasingly concerned about inflation, and they have done an enormous amount of cutting already, dropping the rate nearly three points in just seven or eight months, which is almost unprecedented,” Faucher said.

 

“I think the Fed will want to wait now and see how things play out with the loosening policy and now that the stimulus package is coming into play,” Faucher said, referring to the federal policy decided earlier this year that is now beginning to send out the first payments to taxpayers of what will be a $150bn (€96bn) boost to the economy.

 

In its last rate-setting meeting on 18 March, the Fed chopped its key federal funds rate by 75 basis points to 2.25%.

 

($1 = €.64)

By: Joe Kamalick
+1 713 525 2653

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