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Fed ready 45 year low rate cut Original Source Link: (May no longer be active)
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Reuters
Fed Set to Cut Rates to 45-Year Lows
Sunday June 22, 10:21 am ET
By Glenn Somerville
WASHINGTON (Reuters) - The U.S. Federal Reserve, seeking to rev up a slow recovery while keeping price deflation at bay, is universally expected to cut interest rates to 1958 lows this week.
The sole mystery surrounds whether the 13th in a long line of rate reductions, expected to be announced on Wednesday, will be a quarter or bolder half percentage point.
Speculation about the size of the cut has intensified as economists look beyond next week's decision to a new era of Fed policymaking with exceptionally low rates.
The Fed's bellwether federal funds rate stands at a 42-year low of 1.25 percent, after a steep easing cycle that began in January 2001, when the economy was entering a mild recession and the key lending rate stood at 6.5 percent.
Under the Fed's determined campaign, helped by income-tax rate cuts, growth resumed in 2002.
But the recovery has been halting with growth at around a sub-par 2 percent annual pace that has sent unemployment up to 6.1 percent. Economists and Fed officials fret about a widening "output gap" between the economy's potential 3-to-3.5 percent growth rate and its actual performance.
In addition, U.S. central bank officials have raised the specter of punishing deflation -- a cycle of widespread price declines that could sap incomes and asset values by making it difficult for consumers to pay their debts, a real threat in America's consumer-driven society.
While they have called it small, the risk of deflation has markets waiting for a cut in borrowing costs.
A Reuters poll of 21 top Wall Street bond dealers on Friday found all anticipate a rate cut, with a slim majority of 12 forecasting a half percentage point slash and the remaining nine opting for a smaller quarter percentage point.
WHEELS IN MOTION
Fed Chairman Alan Greenspan set the wheels in motion for a rate drop before Congress on May 21 when he talked about "taking out insurance" against deflation and weak demand.
Talking to fellow central bankers in Berlin earlier this month, he said deflation would be discussed "in some considerable detail" at this two-day meeting of the policysetting Federal Open Market Committee (News - Websites).
The Fed's hope is that a long-awaited pickup in growth -- still not clearly evident in daily economic data but widely forecast -- soon will materialize, again with help from the Bush administration's latest $350-billion of tax cuts.
"We've got tons of liquidity, new tax cuts and ... a dollar depreciation -- if that won't do the job, then what will?" asked economist Sung Won Sohn of Wells Fargo in Minneapolis who expected a quarter-point rate reduction.
There have been some fledgling signs of hope.
Low mortgage rates have kept housing markets sizzling, and in the past week the government said the number of new homes starting to be built was up 6.1 percent, while the Philadelphia Fed said its June factory index rose in June after three straight monthly drops.
MANAGING EXPECTATIONS
With the "core" Consumer Price Index stripping out food and energy rose just 1.6 percent in the 12 months ended May, policy-makers see prices running at uncomfortably low levels and they want to avoid expectations developing that prices will keep dropping.
Economist Rajeev Dhawan of Georgia State University's Economic Forecasting Center questioned whether a rate reduction was warranted.
"I think what they really need to do is to save this rate cut for real contingency situations and not just cut because of a belief that financial markets expect them to," Dhawan added.
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