Fed expected to cut key interest rates again

Updated: 2008-04-30 16:50

WASHINGTON -- The Federal Reserve, which began the year aggressively fighting a severe credit crunch and economic weakness, may push the pause button after delivering perhaps one more quarter-point cut in interest rates.

Fed Chairman Ben Bernanke and his colleagues were to wrap up a two-day meeting Wednesday and financial markets widely expected that the discussions will end with an announcement that the Fed will cut a key interest rate by a quarter-point.

That would be the seventh reduction in the federal funds rate since the central bank began battling against the credit squeeze and the growing possibility of a recession last September.

The Fed delivered two three-quarter-point moves and one half-point cut over an eight-week period from mid-January to mid-March that represented the central bank's most aggressive rate cuts in a quarter-century.

However, the central bank is expected to respond with a less aggressive quarter-point move at this meeting, in part because the financial turmoil seems to have eased and because there are growing concerns about inflation.

While there is some thought that the Fed might decide to forgo a rate cut, most analysts believe that the greater likelihood is a quarter-point move.

"My best guess is that they want to buy a little more insurance against an economy that looks like it is in recession," said Lyle Gramley, a former Fed board member with the Stanford Financial Group.

A quarter-point cut would move the funds rate to 2 percent, a full 3 percentage points below where it was on Sept. 18 when the Fed started cutting rates.

A quarter-point move would trigger a similar reduction in banks' prime lending rate, the benchmark for millions of consumer and business loans, which now stands at 5.25 percent.

The Fed's rate-setting Federal Open Market Committee, composed of Fed board members in Washington and regional Fed bank presidents, is split into two camps. One group is concerned that the severe credit crisis and prolonged housing slump could be pushing the country into a deep recession while a smaller faction is worried that the Fed could be running the risk of letting inflation get out of control even as the economy slows.

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