By Edward Kean Washington, June 25 (BridgeNews) - The biggest question on the minds of investors and economists is by how much, rather than if, the Federal Reserve will cut interest rates on Wednesday as part of its quest to shore up the sagging U.S. economy. A few weeks ago, most economists were expecting the central bank to cut rates by a quarter of a percentage point at its policy meeting June 26-27. But a continued series of disappointing economic statistics, coupled with soothing comments by Fed Chairman Alan Greenspan about the inflation outlook, has prompted a majority of economists contacted by BridgeNews to argue that a more aggressive one-half point reduction is likely.
"It's the safest move for them to make and there's no sign the economy is out of the woods yet," said First Union Capital Markets economist Mark Vitner. The central bank has cut rates by half of a percentage point on five previous occasions this year, lowering the Fed funds rate to 4.0%. Another half point cut would leave interest rates at their lowest level in seven years at 3.5%.
While analysts predicting a one-half point rate reduction say the economy has yet to show clear signs of a turnaround, those looking for a quarter-point cut say it's still too early to see the effects of the Fed's earlier cuts. "It suggests to me they are inclined to move a bit more cautiously now they have put more stimulus into the equation," Resler said. In addition, the Fed is now aware of the details of the $38 billion tax rebate program, which will influence its decision, he said.
HSBC chief economist Ian Morris says the Fed will opt for the quarter-point cut to give itself more room to ease rates further at a later time, perhaps before the Fed's next monetary policy meeting on Aug 21.
"I think there's a chance the Fed may want to save their bullets," Morris said. If the economic statistics remain weak, the Fed might want to be able to cut rates again in July if it lowers rates by only one-quarter point this week, he said.
The Fed will issue a statement after the meeting explaining its decision, and economists expect the Fed will again state that economic weakness is a bigger near-term threat to the economy than inflation. Former Fed Governor Lyle Gramley said the accompanying statement also may contain some hints that the Fed will be less aggressive in the future. The Fed's meeting comes at a time when statistics have shown the economy remains lethargic. The widely-predicted economic rebound has yet to materialize.
"Not only have we not seen a bottom, a lot of the economy seems to be in worse shape than earlier thought," said Scott Brown, chief economist for Raymond James and Associates. While the unemployment rate ticked down in May, the actual number of payroll jobs fell for the second month in a row. Moreover, the manufacturing economy remains mired in recession and industrial production has fallen for eight straight months, including a 0.8% drop in May. Retail sales edged up in May, but at a much slower pace than in April. Moreover, companies have continued to issue warnings about weak profits, and a Fed report issued earlier this month described economic activity as "little changed or decelerating."
During its two-day meeting, the Fed also will update its economic forecasts for this year. Those forecasts will be presented in mid-July as part of the Fed's semi-annual monetary policy report to Congress. In February, the Fed estimated that the economy would grow 2.0% to 2.5% this year. It grew at an annual rate of 1.3% in the first quarter.