Fed set to deliver fresh rate cut to sputtering US economy
The Federal Reserve appeared set to deliver a fresh interest rate cut Wednesday to a struggling US economy just a week after an emergency easing, amid growing evidence of a slowdown.
The Federal Open Market Committee (FOMC) was set to announce a decision around 1915 GMT. Most analysts were expecting a cut in the federal funds rate, with many predicting a half-point reduction.
The meeting was expected to see heated debate on the economic outlook in view of a global stock market swoon and heightened recession fears that prompted the Fed to slash rates by 0.75 percentage points in an emergency move last week.
Last Tuesday’s rate move placed the federal funds rate at 3.5 percent, and was the fourth cut since September 18, when the rate was 5.25 percent.
The cuts in the federal funds rate, used for overnight interbank loans, can help lower a wide range of borrowing costs for consumers and businesses, and as such can help spur activity in an economy buffeted by the worst housing slump in decades that has spilled over to the financial sector.
As the Fed members met, the Commerce Department reported US economic growth slowed dramatically to a 0.6 percent annual pace in the fourth quarter of 2007 amid a worsening housing slump and a related credit squeeze.
“It’s a little weaker than expected. The bottom line is that the economy was losing momentum late last year and we think it will slow further as consumer and business spending will slow,” said Sal Guatieri, an economist at BMO Capital Markets.
Joel Naroff at Naroff Economic Advisors said the report was not as weak as it appeared. Looking at the details, he said the slowdown was exaggerated by a drawdown in inventories and the horrific slump in housing.
“Consumers and businesses continue to spend at very decent paces and that is critical,” Naroff said.
“This report is not bad and the FOMC members will likely read it that way.”
David Kotok, chief investment officer at Cumberland Advisors, said the Fed has sent a signal that it would cut by another 50 basis points this week through its special auction aimed at improving financial market liquidity.
The Federal Reserve said Tuesday its auction resulted in 30 billion US dollars in bids accepted at an interest rate of 3.123 percent. The minimum bid rate was 3.1 percent.
Kotok said the Fed would be in an awkward position if it fails to lower its federal funds rate below the rate of the auction.
“To be consistent, the Fed must cut the fed funds rate by at least 50 basis points on January 30,” Kotok said in a note to clients.
“If it cuts less than 50, it will have created a bidding situation in which 30 billion US dollars was potentially loaned at a subsidy rate and not a penalty rate.”
Joseph LaVorgna, economist at Deutsche Bank, said a cut to a federal funds rate of 3.0 percent would make policy “accommodative,” or stimulative, for the economy by bringing borrowing costs close to the level of inflation.
LaVorgna said the Fed is seeking to “front-load” its policy stimulus, which he said “should go a long way to staving off recession.”
Some analysts said the Fed may want to send a signal that it is unlikely to cut further after this meeting, amid concerns of a return to “easy money” conditions that could create another bubble like the one that burst in housing.
William Gross, a fund manager at Pimco, said the Fed’s move to trim rates as low as one percent in 2003 “were so effective … that they not only bolstered demand but created a housing bubble of Frankensteinian proportions.”
