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Fed Rate Cut Not Sure Thing: WSJ

Reuters
Tuesday, 30 Oct 2007 | 5:01 AM ET

A Federal Reserve interest rate cut this week is no sure thing and officials are not seriously considering a half-point reduction in overnight rates, the Wall Street Journal reported on Tuesday without citing sources.

The article by Greg Ip, the Journal's Fed watcher who is known for sometimes reflecting the views of senior central bankers, said policymakers view this week's decision as a choice between a quarter-point cut to 4.5 percent and not moving at all.

Investors have widely expected the Fed to cut rates at a two-day meeting ending on Wednesday, following a half-point slash in September, to limit the economic damage from the housing market's incessant slide.

Futures on the fed funds rate have shown a small chance of a half-point cut.

Currency traders in Tokyo said the article helped nudge the dollar up slightly from near record lows against the euro and multi-decade lows against other major currencies.

Ip said perhaps the biggest risk for the Fed is that the market's certainty on a pending rate cut puts a burden on the central bank to deliver.

"But the current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology," Ip wrote in the article on the Journal's Web site, www.wsj.com.

The Fed can mitigate such risks with its post-meeting statement by either leaving the door open to a future cut if it does not move this week or by dampening expectations for future monetary easing if it does lower rates, Ip said.

Ip said the case for keeping policy on hold comes down to the economic outlook.

While the housing market has deteriorated further, there has been little evidence of spillover into the broader economy and Fed officials "don't appear to have significantly altered their forecast of a return to moderate growth next year," Ip said.

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