Markets react to hints of Fed policy shift

WASHINGTON – Speculation that the Federal Reserve will cut interest rates to below those in the 15-nation euro zone has helped drive the dollar to a seven-week low against the euro, Bloomberg News said. The dollar was trading at $1.4892 to the euro at 9:11 a.m. in New York, compared with $1.4776 late Friday.
In recent days, both Fed Chairman Ben S. Bernanke and Governor Frederic Mishkin – sometime collaborators in academic research – have spoken in favor of stronger “insurance” against a possible downturn. “They have been forced into a more aggressive stance simply because the market isn’t paying attention to their medium-term forecast,” Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York, told Bloomberg News. “The market doesn’t buy their glass-is-quarter-full view of the economy.”
Even inflation-fearing Philadelphia Fed President Charles Plosser told PBS’ Nightly Business Report on Friday that he is “certainly” open to more rate cuts, while Boston Fed President Eric Rosengren told a gathering in South Burlington, Vt., that declining house prices may further dampen consumer and business confidence.
Those remarks have led futures traders to increase their bets that the Federal Open Market Committee will cut the benchmark federal funds rate by half a percentage point – or more – when it meets Jan. 29 and 30. Contracts quoted on the Chicago Board of Trade indicate traders now see a 34-percent chance the FOMC will cut rates by 0.75 percent. Some even anticipate a rate cut before the policymakers’ meeting.
The FOMC has pared the federal funds rate at each of its past three meetings: by 0.25 percent in December and October, and 0.50 percent in September. (READ MORE.) Further hints of the central bank’s plans are expected this Thursday, when Bernanke testifies before Congress on the nation’s economic outlook.
Additional information on the Federal Reserve System, including past monetary policy statements issued by the Federal Open Market Committee, can be found at www.federalreserve.gov.