Few Expect Fed To Cut Rates Again But Odds Favor More Easing Sometime Later This Year

You won’t have much luck finding an analyst willing to bet the Federal Reserve will cut short-term interest rates next week. But bets are on for an easing later this year.

The Fed’s policy-making arm, the Federal Open Market Committee, meets Tuesday and is expected to leave monetary policy unchanged, with the federal funds rate at 5.75 percent and the discount rate at 5.25 percent.

Fed officials attending the meeting will weigh progress on inflation and try to gauge how much growth may rebound later this year from the paltry second-quarter rate of 0.5 percent.

Donald Fine, chief market strategist at Chase Securities, said, “They are not certain yet what kind of growth we’re going to have in the second half of the year. Will the improvement prove to be (too fast and) inflationary or more moderate?”

Fine, who expects rates to stay where they are until “September at the earliest, more likely November,” said the inflation picture remains benign enough that it wouldn’t pose a counter argument for easing.

Louis Crandall, chief economist at R.H. Wrightson & Associates, agreed Fed officials “are pretty much intent on standing pat. They do want to move more this year, but there is none of the sense of urgency for back-to-back cuts.”

The Fed eased the fed funds rate target on July 6 by 1/4 percentage point, but left the less important discount rate unchanged. The move was the first after more than a year of tightening. In a brief explanation, the Fed said inflation pressures had “receded” enough to allow the rate cut.

“The terms in which they couched their first rate cut indicate they want to move gradually,” Crandall said, adding that he saw an easing move in October or possibly November.

Even though an overwhelming majority of analysts see policy unchanged, not all agree that’s what the Fed should do.

Mickey Levy, chief financial economist with NationsBanc Capital Markets Inc., said the Fed ought to ease on Tuesday, because growth is weak enough.

“Growth is moderate and the inflation fundamentals have improved dramatically,” Levy said, adding he believes “strongly” that the Fed will ease at their subsequent policy meeting on Sept. 26.

Part of analysts’ conviction that the Fed won’t ease in the near term comes from various comments by Fed officials lately, including Vice Chairman Alan Blinder.

Blinder in a recent wire service article was reported as saying the economy would have to weaken more to prompt another easing.

Although a Fed spokesman said the comment was taken out of context, the perception that the most dovish member of the Fed Board was not ready to ease had already filtered into the financial markets.

In an Aug. 10 Knight-Ridder interview, Gov. Susan Phillips said she expects “moderate” second-half annual growth of 2 percent to 3 percent and that inflation pressures are waning, although they still have to ebb more.

Her comments leave the door open for more easing, especially if inflation data continue to improve, although she did not indicate when any move might most likely occur.