Economic hints point to another Fed rate cut

  • Associated Press
  • Monday, October 29, 2007 10:39pm
  • Business

WASHINGTON — The message from Ben Bernanke and his Federal Reserve colleagues is clear: The housing slump will drag on well into 2008 as credit problems linger. What’s not so apparent is how they’ll deal with the crisis, although another interest rate cut could come this week.

In recent speeches, Fed policymakers have stressed that the country is going through a period marked by a high degree of economic uncertainty. Given that, Bernanke and his fellow policymakers have kept their options open about the Fed’s next move.

Since cutting a key rate last month for the first time in just over four years, Fed policymakers have pledged to “act as needed” to keep the economy growing and inflation in check. That broad pledge has left the door open to, among other things, another reduction to its key rate, holding that rate steady or taking more narrowly tailored action by slicing its lending rate to banks.

“We will need to be nimble,” said Donald Kohn, the central bank’s No. 2 policymaker.

With the housing slump deepening, credit troubles persisting and Wall Street on edge, a growing number of investors and economists believe the Fed will lower its key rate.

The federal funds rate probably will be cut by one-quarter percentage point to 4.50 at the end of a two-day meeting Wednesday, these analysts predict. The federal funds rate affects many other interest rates charged to individuals and businesses and is the Fed’s most potent tool for influencing economic activity.

“I’m becoming more inclined to think the Fed is going to cut rates,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

Wall Street agreed, giving stocks a lift. The Dow Jones industrials gained 63.56 points to close at 13,870.26.

Others, however, think the Fed will leave rates unchanged. They worry that galloping oil prices could spread inflation through the economy. Oil prices surged to a new record of $93.53 a barrel Monday.

If the funds rate is lowered, commercial banks’ prime lending rate — for certain credit cards, home equity lines of credit and other loans— would drop by a corresponding amount, to 7.50 percent.

“Things are in motion. There is a lot more velocity in terms of developments in the markets and that makes it harder for the Fed to stay on top of things,” said Brian Bethune, economist at Global Insight. He’s in the camp expecting another rate cut.

While not sending a clear signal on their next move, Bernanke and his colleagues, in remarks over the past month, have been consistent in their assessment that the housing slump and credit crunch pose the biggest risks to the country’s economic health.

The tricky part for the Fed is getting a handle on how these problems will affect buying and investment decisions by individuals and businesses — major shapers of overall economic activity.

“It remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions,” Bernanke said recently. “The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain,” he said.

So far, consumers appear to be holding up to the strains. But fresh pressures on businesses have emerged.

Many big companies have trimmed sales expectations and banks are taking a financial hit. The nation’s largest and second-largest banks, Citigroup and Bank of America, each reported big drops in third-quarter profits, as did Wachovia. Bank of America also announced it was slashing 3,000 jobs.

Foreclosures on homes have soared and lenders have been forced out of business — casualties of the housing and mortgage meltdowns.

The big worry is that individuals and businesses will cut back spending and investing, throwing the economy into a recession.

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