Are Fed rate cuts nearly over?
After a potential cut Wednesday, the central bank may pause to assess the economy.
In the past eight months, the Federal Reserve has embarked on the most aggressive interest-rate reductions since 1982, when America's central bank decided it needed to jolt the economy out of a recession with a massive infusion of money.Skip to next paragraph
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On Wednesday, the Fed is expected to make one more quarter-point drop. But economists anticipate that the central bank, which is chaired by Ben Bernanke, will then pause and reassess the economy. Wall Street will be particularly anxious to see how the Fed explains its actions: whether the pause is because the central bank sees an economy on the mend or because its focus is shifting to inflation concerns.
If interest rates do stop falling, it could give some support to the battered US dollar, economists say. A stronger dollar might discourage some speculative money from being invested in oil and other commodities.
The Fed's actions could also send an important psychological signal, economists say. "A pause by the Fed is a reflection of the fact the Fed thinks the worst is over or at least the bottom is in sight for the economy," says David Wyss, chief economist for Standard & Poor's in New York.
Just before making its decision Wednesday, the Fed will get a chance to view the Commerce Department's initial report on gross domestic product (GDP) for the first quarter. Only a month ago, many economists had expected it would show negative growth. But now the expectation is for a small amount of growth.
Instead, economists expect the negative period of economic growth will be from April to June. Some estimates call for a drop of between 2 and 3 percent, which would be the steepest contraction since the end of 1990.
His bearish view of the economy is not shared by everyone, however. "We may not turn out to have a serious recession," says Lyle Gramley, a consulting economist with the Stanford Group in Washington and a former Fed governor. "It may turn out to be an extended period of modest growth."
Even if the Fed stops lowering interest rates, some economists believe the central bankers will still have to continue addressing the availability of credit. "The Fed is not getting traction with these aggressive rate reductions because of the credit crunch," Mr. Gramley says. "We're not getting the bang for the buck we usually get."