Fed Resumes Meeting, Seen Set to Lower Rates

By Reuters -  |  Posted 2008-04-30 Print this article Print

Is the rate cutting over for the Federal Reserve?

WASHINGTON (Reuters) - The U.S. Federal Reserve resumed a meeting on Wednesday that was expected to lead to a quarter-percentage point interest rate cut and possibly a hint that a rate-cutting cycle kicked off last fall may be at an end.

The Fed will announce its decision on rates and offer an assessment of threats facing the economy at around 2:15 p.m.

Fed policy-makers gathered shortly after the government said the economy grew at a sluggish 0.6 percent annual rate in the first quarter, a slightly stronger-than-expected pace, as inventory-building tempered a deteriorating housing market and softer consumer spending.

Another report showed U.S. private sector employers unexpectedly added 10,000 jobs in April, suggesting the economy retained some resilience

"The key here is that a pullback is more shallow than expected," said Marc Pado, a U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

The data had little impact on financial market expectations for the Fed meeting. Interest rate futures prices implied an 80 percent chance of a quarter-point reduction and a 20 percent probability the Fed would hold rates steady, little changed from late Tuesday.

Fed policy-makers, who have already cut benchmark overnight interest rates by 3 percentage points to 2.25 percent since mid-September, have been confronting a bleak landscape.

The U.S. housing market has shown no sign of hitting bottom and credit markets still appear strained. At the same, elevated prices for food and fuel are causing concerns among both consumers and Fed officials.

In addition to lowering rates to spur the economy, the central bank has rolled out a series of emergency steps to pump billions of dollars of liquidity into financial markets to beat back a credit crunch. Policy-makers will debate a new liquidity tool -- paying interest on bank reserves -- on Wednesday.

While Wednesday's GDP report was more robust than expected, details reflected widespread weakening in the economy. Consumer spending, which accounts for about two-thirds of U.S. output, grew at the weakest rate since the second quarter of 2001, the last time the economy was in recession.

Housing continued its dizzying nosedive, with spending on residential construction recording the biggest drop in more than 26 years and its ninth consecutive quarterly contraction.

At the same time, with gasoline prices heading toward $4 a gallon and strong global demand pushing up food prices, some Fed officials have worried openly that a desire to support the economy could lead the central bank to take its eyes off inflation.

Two officials dissented from the central bank's decision in March to cut rates by three-quarters of a percentage point, preferring a less aggressive move.

The Fed's rate cuts have led to a weakening in the U.S. dollar that has pushed import prices higher, adding to inflation pressures. But Fed officials believe unemployment is likely to climb amid the economy's weakness, making it difficult for businesses to raise their prices, a view that may gain greater sway after the GDP report.

"Current conditions of the production side of the economy are not generating inflation," said Pierre Ellis, an economist with Decision Economics in New York.

Policy-makers also expect the combined effects of the central bank's rate cuts -- which act with a lag -- and a $152 billion fiscal stimulus package will provide a boost to the economy in months to come.

(Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)


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