WASHINGTON – Federal Reserve policymakers are likely to cut interest rates this afternoon as they wrap up a regularly scheduled meeting that began at 8 a.m., analysts told Bloomberg News. It would be the third cut in as many meetings.
At its last meeting – when it pared its target for the federal funds rate by 25 basis points to 4.50 percent (READ MORE) – the Federal Open Market Committee issued a statement saying: “after this action, the upside risks to inflation roughly balance the downside risks to growth.”
“They pretty much tried to draw a line in the sand, by going to a balanced-risks statement … and now, the world’s changed,” Keith Hembre, who used to work at the Fed and is now chief economist in Minneapolis at FAF Advisors Inc., told Bloomberg News. This time, he said, the Fed governors will “leave themselves the opening” for further rate cuts.
Over the month since the Oct. 31 decision, statements by both Fed Chairman Bernard S. Bernanke and Vice Chairman Donald Kohn have acknowledged that the ripples from the credit market’s deterioration are continuing to spread. “The reality is, markets have gotten worse in a way they couldn’t have expected,” said Vincent Reinhart, who was Bernanke’s chief staff adviser on monetary policy before leaving this fall to join the American Enterprise Institute, “and they’ve gotten worse to a point where there are legitimate concerns that it will spill over to the macroeconomy.”
Analysts expect the FOMC to pare the federal funds rate by another quarter of a percentage point, to 4.25 percent, said 115 of 124 economists surveyed by Bloomberg News; of the other nine, two predicted no change in the funds rate and seven predicted a half-percentage-point cut. Traders estimate the chances of a half-point cut at 36 percent, based on futures prices quoted on the Chicago Board of Trade.
The FOMC already has cut the funds rate by 0.75 percentage points (75 basis points) over its past two regular meetings, paring it by 50 basis points in September and 25 in October.
The discount rate the Fed charges on direct loans to banks already has been pared three times – by 25 basis points in October, 50 basis points in September and 50 basis points after the FOMC’s emergency teleconference on Aug. 16 (READ MORE) – leaving it at 5.0 percent.
For additional information about the Federal Reserve System, including past monetary policy statements issued by the Federal Open Market Committee, visit www.federalreserve.gov.
