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Speculation Growing Fed May Be Done Cutting Rates

Reuters
Saturday, 19 Apr 2008 | 12:14 PM ET

Hawkish rhetoric from Federal Reserve officials and a rebound in the stock market has driven down market expectations for additional Fed rate cuts.

On Friday, U.S. short-term interest rate futures, which measure sentiment toward Fed policy, eliminated the implied chance for a half-point rate cut at the April 29-30 Federal Open Market Committee meeting.

Federal Reserve Bank Chairman Ben Bernanke
Ted S. Warren
Federal Reserve Bank Chairman Ben Bernanke

As recently as Monday, futures dealers saw a 50 percent chance for an aggressive cut this month.

"The risk of another half-point cut by the Fed has been vaporized and odds of a quarter point cut are even being whittled away," said strategists at Action Economics.

"This has been reinforced by the 2% surge in the Nasdaq, and a plunge in risk aversion as measured by the Vix volatility index back under 20, compared with 35 on 'Bear (Stearns) Monday'," they said.

The market, which had fully priced a quarter-point cut for the past month, by midday Friday showed only an 82% chance that the FOMC will cut rates at all this month.

Dealers now see 2% as the low point of the current fed funds rate-cutting cycle, compared with the current 2.25%.

A slew of Fed policy-makers from across the ideological spectrum this week cast doubt on the need for more rate cuts to shore up the economy at a time when inflation pressures are evident.

On Friday, Philadelphia Fed President Charles Plosser said the current funds rate of 2.25 percent is low enough to boost economic growth as the lagged impact of previous rate cuts starts to kick in.

Plosser voted against the FOMC's decision in March to lower the funds rate by three-quarters point, as did Dallas Fed President Richard Fisher.

Speaking in Chicago on Thursday, Fisher restated his "strong reluctance" to more interest rate cuts.

Analysts also noted a comment from San Francisco Fed President Janet Yellen, who on Wednesday said that inflation is a "problem" and the Fed must be careful not to cut rates too far.

Inflation also is becoming a worry.

Earlier this week, the government said consumer inflation had climbed 4 percent over the past 12 months, reflecting relentless gains in energy costs, which are up 17 percent over that period, and food prices, which are up 4.4 percent.

"A slowing economy is no guarantee of slowing inflation pressures," Plosser told reporters.

"Inflation is a problem now," another Fed member, Richmond President Jeffrey Lacker said Friday.And the slowdown in the US economy, which normally helps moderate inflation, may not have as much impact this time, he added.

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