Fed Looks Set to Cut Rates More to Avoid Recession

WASHINGTON (Reuters) – The Federal Reserve is expected to lowerinterest rates on Wednesday as part of an ongoing aggressive effort tospare the economy from the worst effects of a deep housing slump andcredit crunch.

The Fed’s policy-setting Federal Open Market Committee resumed itsmeeting about 9 a.m. a central bank spokesperson said. The Fed isexpected to announce its decision at about 2:15 p.m.

Financial markets saw an 80 percent chance the Fed would lowerbenchmark overnight rates by a steep half-percentage point after a weakreading on fourth-quarter growth was released on Wednesday, as thecentral bank seeks to counter the risk of a U.S. recession. Realfourth-quarter gross domestic product rose by 0.6 percent, the CommerceDepartment said.

Any rate cut would follow a surprise three-quarter-point reductionon January 22 and mark one of the deepest and fastest rate-cuttingepisodes since the early 1980s.

"Weaker consumer confidence and spending data, along with risinghousing inventories and plunging home prices, will likely keep Fedofficials concerned about ‘appreciable’ downside risks to growth,"wrote economists at UBS, who are expecting a half-percentage point cut.

In explaining its aggressive move last week, the Fed said theoutlook for economic growth had weakened and downside risks had risen.Policy-makers also said businesses and households were beginning tofeel the pinch of tighter credit.

STOCK GAINS

The rate cut was unveiled a day after global stock markets fellsharply and before U.S. financial markets were due to reopen after theMartin Luther King Jr. holiday.

The emergency move, just one week before the U.S. central bank’sregularly scheduled two-day policy-setting meeting, signaled a highdegree of concern about financial market volatility and economicdeterioration.

The Fed came under fire after its emergency move when French bankSociete Generale revealed two days later it had lost more than $7billion unwinding unauthorized trades by an employee. Markets wonderedwhether the sales had pushed equity prices down, misleading the Fedinto overreacting to the market sell-off.

A Fed official, however, said Monday’s stock market declines werejust one factor in the central bank’s thinking, and policy-makers werestill comfortable with their decision.

An additional factor many analysts believed influenced the Fed’sinter-meeting move was credit-rating trouble among major bond insurers.Downgrades were seen as having the potential to spark a new wave ofbank losses.

WEAK FOURTH QUARTER

The economy’s weaker-than-expected performance in the fourth quarteris likely to be a factor in the Fed’s decision. Analysts had forecastthe economy would expand by 1.2 percent in the last three months of theyear.

That news might be tempered by a report from ADP Employer Servicesshowing private-sector employers added 130,000 jobs in January, aboutdouble what economists expected. The official Labor Department reporton January employment is scheduled for release on Friday.

The government reported earlier this month that the economy added asparse 18,000 jobs in December, a clear sign the economy wassputtering, and a number of prominent economists have warned recessionmay be hard to avoid.

"By not cutting now, the Fed would miss an opportunity to supportthe economy in a timely manner and to get ahead of the curve," wroteUniCredit economist Harm Bandholz, who forecasts a half-pointreduction. "The committee these days leans toward cutting the targetrate too much rather than too little."

However, not all the economic data has been dismal.

A report on Tuesday showed much stronger-than-expected demand forlong-lasting U.S.-made goods in December, while weekly reports haveshown initial claims for jobless benefits declining.

(Reporting by Mark Felsenthal; Editing by Neil Stempleman)

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