Is Fed Reluctant to Slash Rates?
Despite a bad job report, jitters on Wall Street and a housing slump, the Federal Reserve appears reluctant to try to jolt the economy with a major cut of the central bank’s key short-term interest rate.
Although there’s a chance they’ll pare the federal funds rate down by half a point, economists and longtime Fed watchers say the odds are that when the Federal Open Market Committee meets Tuesday, it will trim only a quarter-point from the rate, which now stands at 5.25 percent.
Lowering the rate would reduce borrowing costs on mortgages and other consumer and corporate loans, which in turn could lift the economy.
Among the reasons for the Fed’s caution:
- The Federal Reserve does not want to use large amounts of its rate-cutting ammunition all at once, for fear of worse problems arising down the line.
- The economy, aside from housing and related woes in the financial sector, continues to show moderate strength, and too sudden a move could touch off inflation.
- The sub-prime (bad credit mortgage) trouble that rocked financial markets this summer is not easily fixed by rate cuts.
“I don’t think there’s the sentiment on the committee for a big cut right now,” said Lyle Gramley, a former Fed governor with Stanford Washington Research Group in Washington. “They will wait for better evidence of spillover [from the housing market slump] before they cut more.”
The forecast that the Fed will cut the rates a quarter of a point, widely shared among economists interviewed in recent days, represents a shift from just a week ago, when news that the nation’s job base had shrunk for the first time in four years convinced many that the way had been cleared for the Fed to change course and slash rates to stave off a downturn.
Record exports, a week of rising stock prices and early signs that credit markets were beginning to function again contributed to the change in view.
A modest rate cut could be a disappointment for California, which is now learning how dependent its economy had become on housing.
Last month, home sales in most of the Southern California housing market plunged 36 percent from a year ago to a 15-year low for August.
Meanwhile, new estimates by the California Budget Project found nearly 60 percent of jobs added in the state from 2000-2005 were housing-related.
Continue reading the Los Angeles Times‘ assessment on the Fed’s possible interest rate cut …