Fed Set to Cut Rates


The U.S. Federal Reserve is widely expected to cut interest rates on Tuesday by at least a quarter-percentage point to fortify the economy against a credit crunch and housing slump that some economists fear could bring a recession.

Steady if unspectacular hiring and signs the consumer has yet to fold suggest the economy, while cooling, has not entered a precipitous slide. At the same time, deteriorating conditions in financial markets recently led the Fed to make clear it saw risks rising and was ready to respond.

"They now believe the dysfunctional credit markets present more risk to the economy and the financial system than anything found in the economic or inflation statistics," economists at financial services giant Wachovia wrote in a note to clients.

"For the time being, the Fed will focus on righting the financial markets and making sure there is enough stimulus in place to offset the tightening in credit markets and ongoing unraveling of the housing market," they said.

The U.S. central bank meets against a backdrop of widespread unease over the sagging housing market and deepening gloom over exposure to delinquent mortgages at major financial institutions around the world.

Financial markets are betting the Fed lowers the benchmark federal funds rate by a quarter-percentage point to 4.25 percent from its current level at 4.50 percent, and think a surprise half-point reduction is not out of the question.

At its last meeting on October 30-31, the central bank lowered rates by a quarter point, following up a surprisingly large half-point reduction in September. At the time, the October easing was "a close call," minutes of the meeting released later said, because evidence of a pronounced weakening of the broader economy was not evident to all policy-makers.


Reuters
12/11/2007 6:57:48 AM