Fed set for further interest rate cut

With financial markets spooked about possible economic turmoil ahead, Federal Reserve policymakers are set to decide on interest rates at a meeting concluding on Halloween.

While American children parade in the streets in ghostly attire seeking treats, the central bank is widely expected to implement its second rate cut in as many months.

This could end up soothing frayed nerves or sending an eerie chill through markets at the conclusion of its two-day meeting tomorrow, analysts say.

The Federal Open Market Committee headed by chairman Ben Bernanke surprised some on September 18 with a half-point cut, larger than expected, in the base federal funds rate to 4.75 percent to ease stress in the housing and credit markets.

Now, with markets haunted by concerns about more troubles ahead for real estate and the financial sector, many expect the Fed to take out further insurance with another cut of 25 basis points, or possibly more.

Peter Morici, economist at the University of Maryland, said he sees the potential for another bold move by the Fed in light of the deterioration in the housing market that has pressured the financial sector including mortgage giant Countrywide Financial and investment bank Merrill Lynch.

"Certainly a half-point cut would be in order in view of the revelations of Countrywide and Merrill," Morici said after the Wall Street bank wrote off 7.9 billion dollars in soured investments and Countrywide said it was ready to refinance 16 billion dollars in loans.

"If the Fed doesn't act decisively, the economy is at risk of calamity."

In light of spreading housing and credit market woes, "the risk of recession can no longer be placed below 50 percent", Morici said.

"We cannot get the economy firing on all cylinders until the mortgage market reorganizes and that probably requires a low-interest environment for some time."

Others say the economy is not ready to meet the grim reaper and that conditions may perk up with some modest stimulus from the central bank.

Richard Kelly, economist at TD Bank Financial Group, said he expects one quarter-point cut in rates, with the Fed subsequently on hold into 2008.

"We're not seeing the weakness in the US economy that would justify big rate cuts," Kelly said.

AFP

(China Daily 10/30/2007 page16)