Fed lowers rates, hints cuts may be at end
WASHINGTON (Reuters) - The Federal Reserve lowered interest rates by a modest quarter percentage point on Wednesday, as expected, and hinted the move could be the last in a series meant to buffer the economy from a credit crunch and housing downturn.
The Fed, however, kept its options open and nodded to ongoing financial market stress, tight credit and the deepening housing contraction, leaving some market participants guessing rates could still move lower.
The central bank's action takes the bellwether federal funds rate target, which banks charge each other for overnight loans, to 2 percent -- the lowest since December 2004. It was the seventh cut in a campaign that has brought the key lending rate down by 3.25 percentage points since mid-September.
The Fed also on Wednesday cut the discount rate it charges on direct loans to banks by a matching quarter point.
"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the central bank said.
Two officials -- Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Fed chief Charles Plosser -- dissented from the decision, preferring to hold rates steady.
In addition to citing the "substantial" rate reductions now in place, the Fed took note of rising prices for energy and other commodities and dropped a phrase contained in its last announcement that "downside risks to growth remain."
It also shifted away from a promise to "act in a timely manner" to a softer commitment to "act as needed."
WATCHING AND WAITING
Taken together, analysts said the changes suggested policy-makers were now willing to sit back to see if the economy, which some think may be in recession, picks up speed.
The Fed is "basically telling you that unless their outlook for the real economy deteriorates further, they will stay at 2 percent," Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co (PIMCO), told Reuters.
On Wall Street, U.S. stock indexes closed slightly lower, while prices for government bonds rose. The dollar weakened against the euro, but traded flat against the yen.
A Reuters poll of 19 top bond firms that deal directly with the Fed in the markets found them split on the question of whether the Fed had now done enough to support the economy.
Ten of the so-called primary dealers said the Fed was not done yet, with eight saying it was. One of the dealers surveyed did not offer an opinion.
The median forecast, however, pointed to a further quarter-point cut in the fed funds rate by year-end. Continued...
