Fed looks set to cut rates more to avoid recession
Wed Jan 30, 2008 2:55am EST
By Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve is expected to lower U.S. interest rates on Wednesday as part of an ongoing aggressive effort to spare the economy from the worst effects of a deep housing slump and credit crunch.
Financial markets see a three-in-four chance the Fed lowers benchmark overnight rates by a steep half-percentage point, with at least a quarter-point trim a certainty, as the Fed seeks to counter the risk of a U.S. recession.
Any rate cut would follow a surprise three-quarter-point reduction on January 22 and mark one of the deepest and fastest rate-cutting episodes since the early 1980s. The Fed is expected to announce its decision at about 2:15 p.m. EST.
"Weaker consumer confidence and spending data, along with rising housing inventories and plunging home prices, will likely keep Fed officials 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 the outlook for economic growth had weakened and downside risks had risen. Policy-makers also said businesses and households were beginning to feel the pinch of tighter credit.
STOCK GAINS
The rate cut was unveiled a day after global stock markets fell sharply and before U.S. financial markets were due to reopen after the Martin Luther King Jr. Day holiday.
The emergency move, just eight days before the end of the U.S. central bank's regularly scheduled two-day policy-setting meeting, signaled a high degree of concern about financial market volatility and economic deterioration.
The Fed came under fire when it was revealed two days after its unexpected rate cut that French bank Societe Generale had incurred losses of more than $7 billion unwinding unauthorized trades by an employee. Markets wondered whether the sales had pushed equity prices down, misleading the Fed into overreacting to the market sell-off.
A Fed official, however, said Monday's stock market declines were just one factor in the central bank's thinking, and that policy-makers were still comfortable with their decision.
An additional factor many analysts believed influenced the Fed's inter-meeting move was credit-rating trouble among major bond insurers. Downgrades were seen as having the potential to spark a new wave of bank losses.
WEAK FOURTH QUARTER
While the U.S. economy grew at a robust 4.9 percent annual rate in the third quarter of 2007, gloomy economic data this month -- notably a report of weak hiring in December -- suggests growth has slowed abruptly, and a number of prominent economists have warned recession may be hard to avoid.
"By not cutting now, the Fed would miss an opportunity to support the economy in a timely manner and to get ahead of the curve," wrote UniCredit economist Harm Bandholz, who forecasts a half-point reduction. "The committee these days leans toward cutting the target rate too much rather than too little."
However, not all the economic data has been dismal.
A report released on Tuesday showed much stronger-than-expected demand for long-lasting U.S.-made goods in December, while weekly reports have shown initial claims for jobless benefits declining.
Fed officials will get a look at the government's estimate of fourth-quarter economic growth on Wednesday morning. Analysts polled by Reuters expect the economy expanded at a sluggish 1.2 percent annual rate over that period.
(Reporting by Mark Felsenthal; Editing by Leslie Adler)
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