WASHINGTON (AFX) - The Federal Open Market Committee will cut the federal funds rate target by a cautious 25 basis points on Tuesday to 2.25 pct, analysts said, adding that the committee may be holding back for further cuts and "saving its ammunition." Analysts said that the call is a close one. A slew of bad economic news last week led many analysts to forecast a more aggressive 50 basis point rate cut. At the end of last week, the futures market remained split 50-50 as to the probability of a 50 basis point reduction. Although it is a very close call, the only issue is timing. Almost nobody expects this to be the last rate reduction. Many economists expect the Fed funds rate to fall to 1.5 pct by the end of the first quarter, and economists at Credit Suisse First Boston forecast that the Fed funds will fall as low as 1.0 pct by next spring.
But analysts who argue for caution note that the Fed has already cut rates nine times from 6.5 pct this year. And they note that Congress has passed and is working on more fiscal stimulus. "I think it is more likely that they will ease by 25 basis points," former Fed governor Lyle Gramlich said. The Fed would like to be able to keep lowering the funds rate target until it seems that the economy is turning around, requiring them to more sparingly to "save some ammunition," he said. James Glassman, an economist with Chase Securities, agreed, noting that the FOMC has lowered its funds rates target by 100 basis points since Sept 11.
"They must have known that this (weak economic data) is what we'd see," he said. He said the Fed simply does not know whether the economy will rebound quickly. "There's no visibility. They are in a dark room. They want to keep moving but can afford to be cautious," Glassman said. Glassman said the market appears willing to accept a smaller rate cut, and may be fortified because it could be seen as a "message of business as usual." Robert Brusca, president of Ecobest economic consulting firm, said the Fed is "basically done with the rate reductions to help stimulate the economy" and now is trying to boost the market's morale with further rate cuts. But economists expecting a 50 basis point cut said the weak October NAPM and unemployment reports increase the likelihood that the Fed will remain aggressive. "The data dirge included an 11.5 point drop in the consumer confidence index, a 7.2 point drop in the purchasing managers index and a 415,000 payroll decline," according to Ethan Harris, an economist with Lehman Brothers. These reports "were dreadful enough" to warrant a 50 basis point cut, according to the US economics team at Credit Suisse/First Boston. All arguments in favor of conserving ammunition "have been temporarily suspended." "The economy is in an unusual situation and it requires an accommodative policy from the Fed. With inflation low and the economy possibly stumbling from the blow on Sept 11, the Fed should use its policy tools to the fullest extent possible," according to Mike Moran, an economist with Daiwa Securities America.