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Fed Expected to Cut Rates Another Half Point, to 3%

The Federal Reserve is expected to lower U.S. interest rates another half-point Wednesday as part of an ongoing aggressive effort to spare the economy from the worst effects of a deep housing slump and credit crunch.

Federal Reserve Bank Chairman Ben Bernanke
Pablo Martinez Monsivais
Federal Reserve Bank Chairman Ben Bernanke

The Fed's policy-setting Federal Open Market Committee resumed its meeting about 9 a.m. a central bank spokesperson said. The Fed is expected to announce its decision at about 2:15 p.m.

Financial markets saw an 80 percent chance the Fed would lower benchmark overnight rates by a steep half-percentage point after a weak reading on fourth-quarter economic growth was released Wednesday, as the central bank seeks to counter the risk of a U.S. recession.

Real fourth-quarter gross domestic product rose by 0.6 percent, the Commerce Department said.

Any rate cut would follow a surprise three-quarter point reduction on Jan. 22 and mark one of the deepest and fastest rate-cutting episodes since the early 1980s.

"Weaker consumer confidence and spending data, along with rising housing inventories and plunging home prices, will likely keep Fed officials concerned about 'appreciable' downside risks to growth," wrote economists at UBS, who are expecting a half-percentage point cut.

In explaining its aggressive move last week, the Fed said the outlook for economic growth had weakened and downside risks had risen. Policy-makers also said businesses and households were beginning to feel the pinch of tighter credit.

The rate cut was unveiled a day after global stock markets fell sharply and before U.S. financial markets were due to reopen after the Martin Luther King Jr. holiday.

The emergency move, just one week before the U.S. central bank's regularly scheduled two-day policy-setting meeting, signaled a high degree of concern about financial market volatility and economic deterioration.

The Fed came under fire after its emergency move when French bank Societe Generale revealed two days later it had lost more than $7 billion unwinding unauthorized trades by an
employee. Markets wondered whether the sales had pushed equity prices down, misleading the Fed into overreacting to the market sell-off.

A Fed official, however, said Monday's stock market declines were just one factor in the central bank's thinking, and policy-makers were still comfortable with their decision.

An additional factor many analysts believed influenced the Fed's inter-meeting move was credit-rating trouble among major bond insurers. Downgrades were seen as having the potential to spark a new wave of bank losses.

The economy's weaker-than-expected performance in the fourth quarter is likely to be a factor in the Fed's decision. Analysts had forecast the economy would expand by 1.2 percent in the last three months of the year.

That news might be tempered by a report from ADP Employer Services showing private-sector employers added 130,000 jobs in January, about double what economists expected. The official Labor Department report on January employment is scheduled for release on Friday.

The government reported earlier this month that the economy added a sparse 18,000 jobs in December, a clear sign the economy was sputtering, and a number of prominent economists
have warned recession may be hard to avoid.

"By not cutting now, the Fed would miss an opportunity to support the economy in a timely manner and to get ahead of the curve," wrote UniCredit economist Harm Bandholz, who forecasts a half-point reduction. "The committee these days leans toward cutting the target rate too much rather than too little."

However, not all the economic data has been dismal.

A report Tuesday showed much stronger-than-expected demand for long-lasting U.S.-made goods in December, while weekly reports have shown initial claims for jobless benefits
declining.

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