Fed seen cutting key US rate by quarter-point
Thursday, 1 November 2007
WASHINGTON, Oct 31 (Reuters): The US Federal Reserve is expected to lower benchmark borrowing costs modestly today as an additional bulwark against the risk a housing slump and tighter credit drag down the rest of the economy.
Fed officials, who will announce their decision around 2:15pm (1815 GMT), have offered few clues on their likely course of action. But financial markets are betting that a spate of weak economic data will lead policy-makers to cut overnight interest rates by a quarter-percentage point, to 4.5 per cent.
That would follow last month's surprisingly large half-point reduction - - a move Fed officials had hoped would put them out in front of any potential economic weakness.
"In an economic expansion that had already slowed, leading sectors continue to display surprising softness and further cautious policy action can help to contain a widening out of the damage," Citigroup economist Robert DiClemente wrote in a recent analysis.
But that view is not universally held. Some analysts think the Fed may determine housing woes are not crimping consumer or business spending and may decide the best course is to hold rates steady out of concern a misstep might ignite inflation.
Market bets on the chances of a rate cut have grown in recent weeks as a parade of gloomy economic reports have suggested the economy will be weaker in coming quarters than anticipated by the Fed.
On Tuesday, data showed US consumer confidence slipped for a third straight month in October, while home prices posted their biggest drop in 16 years during August.
But one school of thought holds that markets have overestimated the Fed's appetite for another rate reduction and that the economy, while growing modestly now, is already poised for a pick-up next year.
This hold-steady argument gained prominence with a Wall Street Journal article published late Monday that said the Fed was weighing the risk that a rate cut would fuel an inflationary psychology.
The question for the policy-setting Federal Open Market Committee is whether recent economic data suggests that its view of the outlook needs to be revised.
Fed officials, who will announce their decision around 2:15pm (1815 GMT), have offered few clues on their likely course of action. But financial markets are betting that a spate of weak economic data will lead policy-makers to cut overnight interest rates by a quarter-percentage point, to 4.5 per cent.
That would follow last month's surprisingly large half-point reduction - - a move Fed officials had hoped would put them out in front of any potential economic weakness.
"In an economic expansion that had already slowed, leading sectors continue to display surprising softness and further cautious policy action can help to contain a widening out of the damage," Citigroup economist Robert DiClemente wrote in a recent analysis.
But that view is not universally held. Some analysts think the Fed may determine housing woes are not crimping consumer or business spending and may decide the best course is to hold rates steady out of concern a misstep might ignite inflation.
Market bets on the chances of a rate cut have grown in recent weeks as a parade of gloomy economic reports have suggested the economy will be weaker in coming quarters than anticipated by the Fed.
On Tuesday, data showed US consumer confidence slipped for a third straight month in October, while home prices posted their biggest drop in 16 years during August.
But one school of thought holds that markets have overestimated the Fed's appetite for another rate reduction and that the economy, while growing modestly now, is already poised for a pick-up next year.
This hold-steady argument gained prominence with a Wall Street Journal article published late Monday that said the Fed was weighing the risk that a rate cut would fuel an inflationary psychology.
The question for the policy-setting Federal Open Market Committee is whether recent economic data suggests that its view of the outlook needs to be revised.