Fed to reduce rates yet again

Associated Press

WASHINGTON – The Federal Reserve, faced with an economy now officially suffering through a recession and shedding jobs at the fastest pace in two decades, is widely expected to cut interest rates today for the 11th time this year.

But many economists believe the central bank will also signal that its aggressive credit lowering is drawing to a close by making a quarter-point reduction instead of the bigger half-point moves it has favored for most of this year.

Some analysts had thought that the central bank might decide to leave rates unchanged at its final meeting of the year given some tentative positive signs, such as stronger-than-expected auto sales in October and November and a big jump in factory orders.

Those views changed on Friday when the government reported that the unemployment rate shot up to 5.7 percent in November as another 331,000 Americans lost their jobs, bringing total job losses over the past two months to 800,000, the largest total in 21 years.

“Given the dismal unemployment report, a quarter-point cut is a fait accompli,” said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.

The central bank launched the current easing campaign with a surprise half-point cut on Jan. 3, in between its regular meetings. In the 10 rate cuts so far this year, seven came at regularly scheduled meetings and three occurred between meetings, including one on Sept. 17, the day Wall Street reopened following the Sept. 11 terrorist attacks.

All the activity has pushed the federal funds rate, the interest that banks charge each other on overnight loans, down to 2 percent, the lowest level since 1961.

The Fed’s moves have pushed market rates down as well, with the prime lending rate, the benchmark rate for millions of consumer and business loans, now at 5 percent, the lowest level since June 1972. The prime stood at 9.5 percent when the year started.

The Fed used half-point reductions early in the year, switching to quarter-point moves in June and August.

Since the terrorist attacks pushed the economy into a tailspin, however, the Fed has delivered three more half-point cuts.

Many analysts believe that while the central bank will leave the door open for further rate cuts early next year, the move back to a quarter-point instead of a half-point move will signal that the Fed believes it has done enough to guarantee an economic rebound by the spring.

However, David Jones, chief economist at Aubrey Lanston &Co., did not rule out the possibility that the Fed might decide to cut rates one more time by a quarter-point, perhaps in early January, before the next regularly scheduled meeting on Jan. 29-30.

“All things considered, the Fed would rather be safe than sorry, so they will leave room for more rate cuts,” Jones said, noting several recent comments by Fed officials that they have seen no clear signs yet of an economic rebound.

Other analysts said the Fed’s move may also be governed by whether Congress and President Bush can resolve their differences and gain passage of an economic stimulus bill.

Private economists said the inability to win congressional passage of a stimulus bill is probably one of the key factors influencing the Fed’s decision to cut rates further and hold open the possibility of further rate cuts.

“The Fed is trying to determine how close we are to the end of the recession and whether they are going to get any help from Congress and the administration,” said Mark Zandi, economist at Economy.com.

Even with further Fed rate cuts, analysts said, long-term rates, which are set by financial markets, have probably seen their lows. The rate for 30-year mortgages hit a three-decade low of 6.45 percent in early November, triggering a wave of mortgage refinancings.

That rate now stands at 6.84 percent and analysts said it will probably head higher as signs of a recovery become more solid.