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Fri, Feb 01, 2008 - Page 10 News List

Fed cut leaves investors wanting more

RECESSION FEARS Despite a 1.25-percentage-point cut in the fed funds rate year to date, analysts are predicting more reductions ahead to jump-start the economy


US Federal Reserve Chairman Ben Bernanke, criticized last year for being too tentative in cutting interest rates, has now shown he can act boldly. But the US central bank's two aggressive rate cuts in the past eight days have still left investors demanding more.

That may be a sign of how much trouble the economy is facing, with many analysts contending that the country is flirting with a recession and may, in fact, already be in one.

The Fed announced on Wednesday it was cutting its federal funds rate -- the interest that banks charge each other -- by a half-point, double the quarter-point cut that many economists had been expecting. That move followed on the heels of a reduction last week in the funds rate of three-quarters of a point, which had been the biggest rate cut in more than two decades

The Dow Jones industrial average initially rose more than 200 points after the Fed announcement, but then investors pulled back and the Dow finished the day down 37.47 points, indicating lingering worries about the economy.

All the changes mean that the funds rate, which stood at 5.25 percent in early September before the Fed started cutting rates, is now at 3 percent. The Fed is hoping the lower rates will stimulate the economy through increased borrowing by consumers and businesses.

While Bernanke and his Fed colleagues were criticized last year for giving the appearance that they were cutting rates only grudgingly, the rate cuts last month signal that the Fed is in full-blown crisis mode.

The 1.25 percentage point reduction in the funds rate in just over a week is unprecedented in recent memory. The Fed hasn't been that aggressive about cutting the funds rate since the early 1980s, when then-chairman Paul Volcker was reversing a tightening cycle that had driven interest rates to the highest levels since the Civil War in a successful effort to break the back of a decade-long bout of inflation.

In its statement on Wednesday, Fed officials said its string of rate cuts "should help to promote moderate growth over time and to mitigate the risks to economic activity."

Analysts saw that language as an effort to tell markets that just because the Fed slashed rates last month, such bold actions should not be expected in the future. But those words could very well fall on deaf ears.

"The markets felt the Fed had fallen behind the curve. That caused a loss of credibility," said David Jones, chief economist at DMJ Advisors. "Once the Fed loses credibility, it can be hard to regain it."

Investors are already betting that there are more rate cuts to come. A futures contract tied to the federal funds rate is projecting that rate could get down as low as 2 percent this summer.

The Fed's next meeting is on March 18 and that will be followed by meetings in April and June. Many analysts said the Fed could trim the funds rate by a series of quarter-point moves during that period, especially if the economic data remains weak.

The government reported on Wednesday that GDP grew at a barely discernible 0.6 percent rate in the October to December period. Some economists fear that the GDP rate could slip into negative territory in the current quarter. By one definition, a recession occurs when the GDP is negative for two consecutive quarters.

While the Fed is not publicly forecasting a recession, Bernanke and other officials have said they expect to see a period of slow growth, reflecting the impact of the severe housing slump and the credit squeeze which hit last August.

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