Wednesday, 30 January, 2008

Fed May Cut Rate to 3%, Hold Out Chance of More Cuts

The Federal Reserve may lower interest rates for the second time in nine days and indicate a readiness to go further if the economy deteriorates.

The Federal Open Market Committee, ending a two-day meeting today, will probably follow the Jan. 22 emergency reduction with a half-point cut in its benchmark rate, according to 48 of 85 economists surveyed by Bloomberg News. Such a move would bring the rate to 3 percent.

Officials may cite ``appreciable'' risks to growth, a word used for the first time last week, avoiding what analysts said were the mistakes of 2007's statements. Through December, the FOMC referred to ``inflation risks,'' confusing some investors about its intentions. To avoid the impression of a blank check, Chairman Ben S. Bernanke will also seek language that notes the cumulative cuts since September, Fed watchers said.

``The statement will have a soft bias,'' said Brian Sack, a former research manager at the Fed's monetary affairs division, and now senior economist in Washington at Macroeconomic Advisers LLC. ``It certainly won't promise additional rate cuts, but it will talk enough about downside growth risks to leave that option open.''

The Fed's announcement is scheduled for about 2:15 p.m. in Washington. While most economists predict a half-point move, 21 in Bloomberg's survey forecast a quarter-point cut, one called for 0.75 percentage point and 15 saw no change.

Half-Point Move

Traders estimated a 70 percent chance of a half-point move and 30 percent odds on a quarter-point, based on futures prices on the Chicago Board of Trade. Treasuries rose on speculation of another rate cut with notes gaining for the first time in three days.

European banks today announced further losses stemming from the collapse of the U.S. subprime mortgage market. UBS AG, Europe's largest bank by assets, reported a record loss after about $14 billion of writedowns on assets related to housing loans made to borrowers with poor credit histories. BNP Paribas SA, France's biggest bank, reported a 42 percent decline in fourth-quarter profit following 589 million euros ($871 million) of costs linked to the turmoil.

Fed watchers said that questions about Bernanke, 54, and his handling of the economy and financial-market volatility have focused more on the central bank's communication through FOMC statements than its actions with rates.

`Tactical Errors'

``They've created a sense that the Fed doesn't really know where it's going or isn't in control,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. Harris, a former head of domestic research at the New York Fed, said officials have committed ``tactical errors,'' where ``they seem to suddenly switch direction in unpredictable ways.''

As turmoil increased in credit markets and signs of economic weakness spread, Fed policy makers clung to their views that inflation was a major concern, beginning with the Aug. 7 statement. The Fed finally jettisoned that stance on Jan. 22.

After a slide in Asian and European stocks threatened to send U.S. equities down more than 5 percent last week, Bernanke enacted the deepest cut since the Fed began using the federal funds rate as its main policy tool around 1990. The FOMC cited ``appreciable downside risks to growth'' and said it would ``act in a timely manner as needed to address those risks.''

``That's the kind of clear message that the Fed should have been sending from the very beginning,'' said former Fed Governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. ``And from the very beginning, I mean from Aug. 7.''

News Conferences

Bernanke lacks the flexibility of his counterparts at the European Central Bank and Bank of Japan, who hold news conferences after rate decisions that allow a fuller discussion of the meetings. The Bank of England chief also holds quarterly press briefings.

In the U.S., investors are left to interpret a statement of about 100 words. The missive has evolved since the Fed first began issuing one after rate decisions in 1994. Originally, the FOMC voted only on the tilt of monetary policy, and the statement was issued in then-Chairman Alan Greenspan's name.

Now, the FOMC's debate over the statement starts before the meeting, as members exchange thoughts over e-mail. The FOMC votes on the full statement, while it's unclear whether members have the scope to dissent over the wording, said Vincent Reinhart, who was the Fed's chief monetary-policy strategist from 2001 until September.

`Easing Cycle'

Today, ``what I'm going to be looking for are signs that the committee wants investors to think about this entire easing cycle,'' said Reinhart, who is now at the American Enterprise Institute in Washington.

Hours before the Fed decision, the Commerce Department releases its first estimate of fourth-quarter U.S. growth. The economy probably expanded at a 1.2 percent annual pace, according to the median estimate in a Bloomberg survey. The release is scheduled for 8:30 a.m. in Washington.

Morgan Stanley, Goldman Sachs Group Inc., Citigroup Inc. and Merrill Lynch & Co. are among the Wall Street firms forecasting a recession this year.

Bringing the target rate for overnight loans between banks to 3 percent from 5.25 percent before the Fed started cutting it in September would mark an ``unusually aggressive'' easing, said Michael Feroli, a former researcher at the Fed. In the last two recessions, the Fed didn't lower rates this much until six months after the economy's downturn began, he said.

Policy makers today may highlight that the magnitude of their actions ``should help promote moderate growth,'' said Feroli, now an economist at JPMorgan Chase & Co. in New York. ``They want to get across the idea that they're'' not expecting a further series of rate cuts, he said.