Are Fed rate cuts nearly over?
After a potential cut Wednesday, the central bank may pause to assess the economy.
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However, banks have been raising capital, he notes. "It suggests the banks are starting to heal a little bit," he says.Skip to next paragraph
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The Fed may talk about the credit problem in the statement that it issues once it announces its decision on rates, says Doug Roberts, a monetary expert at Channel Capital Research Institute in Shrewsbury, N.J. In recent weeks, the Fed has been active in providing the banking system with liquidity. "There is not a pause in the credit crisis," he says.
If the Fed does stop lowering interest rates, Mr. Roberts expects to see some temporary strengthening of the US dollar. The dollar, he adds, may also get some help from the European Central Bank, which may also lower interest rates. One reason: German consumer confidence is down, he says.
Mr. Wyss thinks the Fed may have some room to pause since the rebate checks, part of the government's $152 billion stimulus package, will have started going out on Monday. Some 130 million Americans will receive the payments: $600 per person, $1,200 per couple, and an additional $300 per child.
"The Fed will want to see if Americans spend the money before they decide if the economy needs an extra boost," Wyss says. "There is enough going out for a quarter [three months] of growth."
Analysts will be watching closely for any signs that the Fed is becoming alarmed about inflation. Last month, the Labor Department reported that consumer prices grew by 4 percent compared with a year ago. "We're starting to see increases," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "If you drive a lot, eat dairy products, and send your kids to college, it will be a lot higher."
Even more worrying for the Fed are surveys that find Americans are starting to expect higher prices. One such survey is from Reuters and the University of Michigan. "But so far, it's more in the short run than the long run," Mr. Brown says.
Even though the Fed is expected to lower rates again, the effect on consumers' pocketbooks may be modest. For example, variable-rate credit cards could see rates drop by a quarter of a percentage point. But on a $5,000 balance, that would save $1 a month, estimates Bill Hardekopf, CEO of LowCards.com, a consumer website.
"It's not going to send you on your way to buying a new car," he says, "but every bit helps."