Fed may pause after cutting rates next week: report

TOKYO (Reuters) - The Federal Reserve is likely to cut interest rates by a quarter percentage point at a policy meeting next week but may then be ready to take a break, the Wall Street Journal's online edition reported on Thursday.

The Fed is likely to lower the federal funds rate from the current 2.25 percent at a two-day policy meeting that ends next Wednesday, the Journal said in an article written by Greg Ip, the paper's Fed reporter who is sometimes seen as reflecting the views of senior policymakers.

But because some Fed officials are concerned that lowering interest rates could add to inflationary pressure with little benefit for growth, the option of standing pat is also likely to be on the table, it said, without quoting a direct source.

"If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal funds rate to 2.25 percent from 5.25 percent since last year," the newspaper said.

"The shifting sentiment doesn't mean the Fed thinks the worst is past for the economy. It is almost certain to signal continued concern about economic growth and a willingness to cut rates further if the outlook worsens," the newspaper said.

The possibility of the Fed lowering interest rates to 2 percent next week and then pausing is in line with market expectations, market players said.

U.S. short-term interest rate futures show that investors see a roughly 80 percent chance of the Fed lowering interest rates by 25 basis points to 2 percent next week, and a 20 percent chance that the Fed will hold rates steady.

A little over a week ago, investors had seen a roughly 50 percent chance of a deeper, 50-basis-point rate cut. But such market expectations have since disappeared, due to a series of warnings from Fed policymakers about the risk of inflation.

(Reporting by Masayuki Kitano)