Fed Resumes Meeting, Seen Set to Lower Rates

WASHINGTON(Reuters) – The U.S. Federal Reserve resumed a meeting on Wednesdaythat was expected to lead to a quarter-percentage point interest ratecut and possibly a hint that a rate-cutting cycle kicked off last fallmay 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 theeconomy grew at a sluggish 0.6 percent annual rate in the firstquarter, a slightly stronger-than-expected pace, as inventory-buildingtempered a deteriorating housing market and softer consumer spending.

Another report showed U.S. private sector employers unexpectedlyadded 10,000 jobs in April, suggesting the economy retained someresilience

"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 theFed meeting. Interest rate futures prices implied an 80 percent chanceof a quarter-point reduction and a 20 percent probability the Fed wouldhold rates steady, little changed from late Tuesday.

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

The U.S. housing market has shown no sign of hitting bottom andcredit markets still appear strained. At the same, elevated prices forfood and fuel are causing concerns among both consumers and Fedofficials.

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

While Wednesday’s GDP report was more robust than expected, detailsreflected widespread weakening in the economy. Consumer spending, whichaccounts for about two-thirds of U.S. output, grew at the weakest ratesince the second quarter of 2001, the last time the economy was inrecession.

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

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

Two officials dissented from the central bank’s decision in March tocut rates by three-quarters of a percentage point, preferring a lessaggressive move.

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

"Current conditions of the production side of the economy are notgenerating inflation," said Pierre Ellis, an economist with DecisionEconomics in New York.

Policy-makers also expect the combined effects of the central bank’srate cuts — which act with a lag — and a $152 billion fiscal stimuluspackage will provide a boost to the economy in months to come.

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