The Federal Reserve is likely to follow its bold action last week to battle an economic downturn with a further interest rate reduction Wednesday, although analysts are split on just what size the future cuts will be.
Some believe the Fed will settle into a series of quarter-point moves, especially if upcoming economic reports show the economy is slowing but not toppling into an actual recession.
That would mean the Fed will cut its federal funds rate, the interest that banks charge each other, by a quarter point at the conclusion of Wednesday’s meeting on interest rates. It would be the fifth rate cut since last September. The Fed’s decision on rates is expected shortly after 2:15 p.m. ET.
Last week, the Fed announced a surprise three-quarter-point cut which drove the funds rate down to 3.5 percent. It was the largest reduction in this rate in more than two decades and the first change in the funds rate between meetings since the immediate aftermath of the September 2001 terrorist attacks.
Federal Reserve Chairman Ben Bernanke and his colleagues held an emergency videoconference call on Jan. 21 after a turbulent day on world markets when investors grew increasingly worried about what a recession in the United States would do to the prospects for global growth.
Many analysts believed the Fed would quickly follow last week’s aggressive move with a cut of at least a half-point at its first regular meeting of the new year. While some economists are still looking for a half-point cut, other economists are arguing that the Fed is likely to produce only a quarter-point reduction, especially in light of some better-than-expected recent economic data.
The most surprising report came Tuesday with news that orders to U.S. factories for big-ticket durable goods jumped 5.2 percent in December, the biggest increase in five months, and demand in a key series that tracks business investment shot up at the fastest pace since last March.
That unexpected strength may be a signal that the current slowdown will not be as severe as first believed although analysts cautioned that it would be a mistake to read too much into one report.
Also being closely watched is the broadest measure of economic health, the gross domestic product. Many analysts believe the GDP slowed to an anemic rate of around 1 percent in the October-December quarter and could fall into negative territory in the current January-March period. One definition of a recession is two consecutive quarters of falling GDP. A Commerce Department report on fourth-quarter GDP was due out Wednesday several hours prior to the Fed’s expected announcement on its interest rate decision.
Worried about the possibility of a downturn, the House on Tuesday overwhelmingly approved a $146 billion economic stimulus bill. Passage in the Senate could be slowed by an effort to expand the measure.
Whatever the Fed does Thursday, analysts said that further rate cuts are likely until the central bank is sure that the economy is back on sound footing. Bernanke pledged in a speech on Jan. 10 to take decisive action to combat a slowdown. Many economists believe the funds rate could fall to 2.5 percent before the Fed stops easing.
“It is clear that the Fed has moved into a crisis-fighting posture,” said David Jones, chief economist at DMJ Advisors.