Fed isn't finished by a long shot>>>
Economists, investors are confident there's more easing in the pipeline
By Greg Robb, MarketWatch
Last update: 12:29 p.m. EST Jan. 22, 2008
WASHINGTON (MarketWatch) -- Tuesday's surprise interest-rate reduction by the Federal Open Market Committee doesn't mark the end of U.S. rate cuts by any means, Federal Reserve watchers say.
"Don't take today's move ... to mean that the FOMC is through," said Richard Moody, chief economist at Austin-based Mission Residential, in a note to clients. "We expect another funds rate cut at the scheduled January 29-30 meeting, with possibly more to come in the spring."
Investors seemed open to the idea of further reductions. Wall Street's key equity benchmarks battled back after suffering steep losses at the opening but remained broadly lower at midday. See Market Snapshot.
And the federal funds futures market now points to a 2% fed funds rate by September, Fed watchers said.
Acting on the heels of a global market meltdown in financial markets Monday, the Fed early Tuesday lowered its overnight lending rate by three-quarters of a percentage point, to 3.50% -- a rare move between formal meetings of the central bank's policymakers.
The FOMC also lowered its discount rate by 75 basis points, to 4%. See full story.
It was the largest cut in the fed funds rate since the Fed began using this as its primary tool in 1990.
Fed officials said the FOMC convened via videoconference Monday night to discuss the economic outlook and monetary policy.
The vote to ease monetary policy was one-sided but not unanimous. William Poole, president of the Federal Reserve Bank of St. Louis, voted against the rate cut. Poole has spoken several times about the benefits of predictable monetary policy moves taken at formal meetings.
Including Tuesday's action, the Fed has now cut the funds rate by 1.75 percentage points since last fall. Rates stand at their lowest levels since September 2005.
How low will they go?
Nigel Gault, chief U.S. economist at Global Insight, believes the central bank will eventually get rates as low as 2.5% before the current easing cycle draws to a close.
The Fed's likely to cut rates again by another quarter of a percentage point at their formal meeting next week, he said in a telephone interview.
Scott Anderson, senior economist at Wells Fargo Economics, said the Fed "will cut another 75 basis points by the end of April, bring the fed funds target rate to 2.75%."
He said the Fed won't be keen to move below that level in order to keep some ammunition in reserve "for a rainy day."
What about next week?
Tuesday's emergency rate move raises the immediate question: What the Fed will do at its formal meeting next week?
Many Fed analysts point out that because the shaky state of global financial markets seemed to be the catalyst for Tuesday's inter-meeting rate cut, the size of any reduction next week will depend on whether the markets show signs of calming down in the interim.
If the market returns to more normal conditions, a quarter-point cut is a possibility, said Dean Maki, chief U.S. economist at Barclays Capital.
Lawrence Meyer, a former Fed governor and now one of the most widely followed Fed analysts, told clients to expect a half-point cut next week, which would bring the fed funds rate to 3%.
No stopping a recession -- if it's here
The rate cut comes as the dangers of a recession are increasing and as global credit markets remain frozen.
Home prices are now expected to decline between 10 and 15% over the next 12 months, raising a many-headed hydra of concerns -- about consumer spending, credit-card debt and demand for goods and services.
Indeed, some economists, including the economic team at UBS, already predict two quarters of "negative growth," from January to June of this year, in gross domestic product. Two months of negative growth is the shorthand definition of a recession.
The formal definition is set by a panel of prominent academic economists, most of the time many months after the fact.
The Fed's cuts, in and of themselves, can't stop a recession if one has indeed started. Instead, they are aimed at helping the economy recover in a time frame of approximately six months down the road, Gault said.
"They have to think if they want the economy to be recovering rather than marred or moving sideways," he said.
"The evidence on the economy has deteriorated sharply, suggesting a recession is more likely than not, and if you're in risk-management mode this is the risk to worry about," Gault said.
"The Fed had not been particularly aggressive to date," he noted.
Throwing 'caution to the wind'
David Resler, chief economist at Nomura Securities, said he had a feeling that Fed chief Ben Bernanke was reacting to sharp criticism from Wall Street that he has been too indecisive since the global financial freeze began last August.
Therefore, the bias looking ahead should be one emphasizing "greater action taken sooner than later," Resler said in a research note that he entitled "Caution to the Wind."
Resler said he expects a half-point cut next week and then a pause before the next FOMC meeting, scheduled for March 18, to assess the exact nature of the fiscal stimulus package now under negotiation between the Bush administration and Congress.
Greg Robb is a senior reporter for MarketWatch in Washington.
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