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Fed's Policy Statement Draws Mixed Reviews

The Federal Reserve cut interest rates another half point Wednesday, but economists are divided about whether its accompanying policy statementwill successfully manage market expectations

Having slashed its federal funds rate three-quarters of a point just a week ago, the Fed used much of the same language this time around in cutting both the funds and discount rates. But that statement also drew varying interpretations of what was next to come from a central bank that has surprised market watchers more than once in recent months..

“I think it is completely neutral,” said Mark Rogers, senior U.S. economist at econoday.com, who thought the Fed might signal a pause in its easing campaign.

Federal Reserve Chairman Ben Bernanke.
Mary Altaffer
Federal Reserve Chairman Ben Bernanke.

“This policy statement struck the right balance, “ countered David Resler, chief economist at Nomura International, adding the statement implies the Fed won’t have to wait for the FOMC meeting to move if conditions warrant.

The Fed next meets March 20-21, which means another long gap between regularly scheduled meetings, much like the December-January period.

In its statement Wednesday, the Fed once again referred to a downturn in the housing market and weakening labor market, making it clear the risks to growth were its major concern.

In a subtle departure, however, the central bank appeared to soften its description of the weakening economy, reverting to the “downside risks” phrase in its December statement rather than perpetuating the “appreciable downside risks” used in its statement last week when it made a rare intra-meeting cut.

Some economists expected as much. After the fact, Rogers suggested deletion of the word means "there's been improvement in the financial markets," not the real economy.

Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, also noted the deletion, saying it was an attempt to "water down" the language but added the continued mention of "these downside economic risks telegraph the Fed's intent to move again at the upcoming March meeting all things being equal."

For inflation hawks there was little reason for cheer. Like last week, the Fed devoted one sentence to inflation--versus two in its December statement--and failed to even mention key phrases such as “inflation risks remain” and “foster price stability.”

Even before the Fed's latest rate cuts, some economists expressed concern that the central bank has to some extent taken its eye off of inflation.

“You're not going to get relief on the inflation side,” warned Robert Brusca, chief economist at Fact And Opinion Economics.

Once again the Fed said it "expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."

“I find it disconcerting, “ said Rogers, adding that the Fed's latest statement clearly shows it is “relying on its economic forecast,” the next version of which is released Feb. 20.

The latest cut puts the federal funds rate at 3.00 percent, far from its rate of 5.25 percent in August, when the credit crunch and weakening economy first seemed to get the Fed's attention.

Brusca says the Fed is being "aggressive in an unprecedented way."

In CNBC’s latest “Trillion Dollar Snap Survey”, roughly four out of five respondents said the Fed made the right decision, but only 4 percent would grade Bernanke’s overall performance an “A”. (See full results)

This comes after the Fed has been also accused of being both behind the curve and kowtowing to Wall Street. Wednesday's statement mentioned financial markets "under considerable stress", before qualifying economic conditions, suggesting more of the latter.

"Today's move was made for Wall Street, but the move in March may be more dependent on the state of the real economy, " concluded Rupkey, who is among the many economists who say it is too soon to say a recession is imminent or already underway.

Prior to the the rate cut, some economists were saying Bernanke needed to send a clear message about what the Fed thinks about the economy and what it might do about it. That may still be unclear in the FOMC's action and statement Wednesday.

"The Fed is still groping around the economy," said Rogers. "We expect more from the Fed but the Fed realizes it's very difficult to get a good pulse on the economy right now."