Sun, Nov 18, 2007 - Page 11 News List

US Federal Reserve may hold rates steady

HINT, HINT With unusual frankness, a Federal Reserve governor on Friday said further cuts to interest rates would probably not offer much more benefit to the US economy


A Federal Reserve governor said on Friday that another cut in interest rates would probably offer few additional benefits to the economy, a hint that the central bank plans to hold rates steady at its meeting next month.

Members of the Fed are usually circumspect. But Randall Kroszner, who will vote at the bank's policy meeting on Dec. 11, offered a surprisingly candid view that the current benchmark interest rate of 4.5 percent should sustain economic stability, even in what he acknowledged would be a difficult fourth quarter.

"The current stance of monetary policy should help the economy get through the rough patch during the next year," Kroszner said in remarks to the Institute of International Finance in Manhattan.

He added that central bankers might not be swayed by a new batch of poor economic data, although there may be plenty on the way. The Fed announced on Friday that industrial production fell 0.5 percent last month.

"A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate," he said.

Kroszner warned that the housing recession was likely to worsen and predicted weaker home sales and a cutback in consumer spending as mortgage rates rise and foreclosures increase. But he said he expected the economy "to return to its longer-run sustainable rate" after a difficult few months. "Conditions for subprime borrowers will get worse before they get better," he said.

The Fed surprised market watchers in September when it cut its benchmark overnight lending rate by half a percentage point.

That move sent stock markets soaring as investors hoped easier credit would stimulate the economy and allay the subprime turmoil.

Last month, the Fed cut interest rates again by a quarter-point.

The bank's statement at the time suggested a reluctance to ease rates further.

In his remarks, Kroszner warned against a series of consecutive rate cuts, suggesting such a move could set off inflation.

"All else equal, each successive action in the same direction tends to lower the incremental benefits and to raise the incremental costs of additional actions," he said.

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