The Federal Reserve opened a two-day meeting Tuesday widely expected to cut key interest rates for the sixth time this year amid signs of a tepid recovery for the US economy.
Analysts remained divided over the likelihood of a reduction of a quarter-point or a half-point in the key federal funds rate. The meeting opened at 1800 GMT Tuesday, with an announcement expected around 1815 GMT Wednesday.
The Open Market Committee under chairman Alan Greenspan last acted May 15, cutting the federal funds rate by a half-point to four percent in the face of weak data that fueled fears of recession.
Weeks later, the economy is showing some signs of a recovery, albeit sluggish, and the Fed may be concerned that because of the lag time for cuts to work their way through the economy, cutting rates too much might rekindle inflation.
"The FOMC must strike a balance between responding to the current weak state of the economy and a probable acceleration later this year or early next," said Henry Willmore of Barclays Capital.
"The inflationary situation is not as good as portrayed by some Fed officials but allows them, at least for now, to focus primarily on stimulating growth ... Taking into account all of these crosscurrents we expect the FOMC to ease by 25 basis points at this meeting."
Other analysts say the Fed is fighting a battle of public relations as well as economics, and that officials want to avoid a consumer retrenchment that could worsen the downturn and slow the recovery.
"The economy is still very close to the edge of recession," said Lyle Gramley, a former Federal Reserve board governor, who expected a 50 basis point cut.
William Dudley, chief economist at Goldman Sachs, agreed. "We're not quite in a recession but it is pretty close. The Fed is basically trying to prevent it and that is why in our view they will cut by 50 basis points."
The US economy expanded at a tepid 1.3 percent rate in the first quarter, and few economists expect any improvement in the current quarter.
But there are some indications of a rebound in the US economy, even though it is unlikely to return to last year's red-hot pace,
On Tuesday, the Conference Board reported that its closely watched index of US consumer confidence rose to 117.9 in June from 116.1 a month earlier. And the Commerce Department reported that US orders for durable goods -- items expected to last three years or more -- rose 2.9 percent in May, also stronger than expected.
"May durable goods orders were very encouraging," said Stephen Gallagher of Societe Generale. "We hope this is the light at the end of the dark tunnel for the manufacturing sector."
Joel Naroff of Naroff Economic Advisers noted that recent data including a 0.8 percent increase in new home sales showed the economy is not dormant.
"When households decide to start furnishing all the new homes they are buying, watch out because this economy will start soaring again," he said.
Naroff said that while some sectors of the US economy are ailing, the overall economy remains healthy.
"If you are in the high-tech, communications, computer or metals industries, you are in trouble," he said. "But otherwise, forget it. And that is why home sales remain extraordinarily robust ... we cannot talk about recessions without focusing on where the problems exist."
Naroff said that the sustained strength of the housing market "cannot be dismissed and this report raises the probability that the Fed will only cut rates 25 basis points" on Wednesday.
(China Daily 06/27/2001)
