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As Fed Meets, Markets Still Count On Interest-Rate Cut

Federal Reserve policy-makers began meeting Tuesday as financial markets continued to bet that the central bank will cut interest rates again to shore up the faltering housing and credit markets.

The central bank's Federal Open Market Committee began a two-day meeting at 2 p.m. with futures markets expecting that it will announce a quarter-percentage-point cut in rates at about 2:15 p.m. Wednesday.

AP

A note of caution hit the markets this morning after an article in the Wall Street Journal said a rate cut is not a sure thing. Although stocks fell in reaction, most market pros still believe that the Fed will indeed cut rates.

That would be on top of a surprise half-point reduction the Fed made on Sept. 18 to its trend-setting federal funds rate for overnight loans between banks and would bring the key rate to 4.5 percent, its lowest since March 2006.

There was a only a slight doubt in financial markets Tuesday whether policy-makers would cut rates Wednesday, with futures markets pricing in more than a 90 percent chance for a small reduction.

Bad News on Housing

Another dose of bad news on housing on Tuesday morning helped dissipate lingering doubts on rate cuts.

The Standard & Poor's/Case Shiller national home price index showed prices in 10 major metropolitan areas fell 0.8 percent in August -- a reminder of the deep housing-sector slide that policy-makers say is a key risk to the economy.

The report showed home prices were down 5 percent from year-ago levels, the biggest year-over-year decline since June 1991, just after the 1990-91 recession ended.

Not surprisingly, separate data Tuesday from the Conference Board showed consumer confidence tumbled for a third straight month in October, reaching a two-year low.

"Further weakening in business conditions has, yet again, tempered consumers' assessment of current-day conditions and may very well be a prelude to lackluster job growth in the months ahead," said Lynn Franco, director of the Conference Board's consumer research center.

GDP Data Due

During the two-day meeting, in which the Fed may also resume a discussion on potential changes to their communications policy, officials will get a reading on third-quarter economic growth, which should at least assure them that a precipitous decline in activity has not taken
hold.

Economists surveyed by Reuters predict that gross domestic product figures Wednesday morning will show the economy expanded at a 3 percent annual rate in the third quarter. That
will be only a moderate easing from the 3.8 percent growth in the second quarter, although a steeper slowing is expected in the final three months of the year.

The expected fourth-quarter softness puts a burden on Fed Chairman Ben Bernanke and his colleagues to meet their test of sustaining a noninflationary expansion at time when a housing
downturn and credit-market strains are weighing heavily.

In a speech on Oct. 19, Bernanke said that during times of stress, policy-makers must be prepared to counter uncertainty by acting boldly with measures to ward off a worse situation.

"Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes," Bernanke said -- words that would echo the thoughts of many of
those on Wall Street.

Contact Economy

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