FED Expected To Cut Rates One More Time Then Pause

By Martin Crutsinger

ASSOCIATED PRESS

7:08 a.m. April 30, 2008

WASHINGTON – 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, a full 3 percentage points below where it was on 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.