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Fed expected to add another rate cut,
but how much?
By • Bankrate.com
The
Federal Reserve Board will almost certainly serve up more economic
stimuli on Jan. 31. But whether it's another oversized heaping of
interest rate pudding or something less remains to be seen.
Officials could cut rates by one-quarter of a
percentage point, or 25 basis points, rather than the 50 basis points
they dollaped out Jan. 3. Or, they could opt for the larger cut.
Either way, rates on products such as credit cards, home equity
lines of credit and certificates of deposit will head lower.
But they may not fall as much in the months ahead,
as people once expected, thanks to a stock market rebound and increasing
support for federal tax cuts -- including a ringing endorsement
from Fed Chairman Alan Greenspan on Jan. 25.
Tamed expectations
"For a while the market had baked in another 50 basis
point cut, but some of the trail-off has been that people think
it might only be a quarter," says John Hoie, secondary market
manager with Omaha, Neb.-based Commercial Federal Corp.'s mortgage
company.
"They're going to wait and see if the tax
cuts do go through and the fact that Greenspan's supporting that
almost locks in some kind of tax cut," he adds. The Fed "will
probably go a little cautiously because of that. They don't want
a recession, but they also don't want a speculative bubble."
From last May through the end of 2000, the federal
funds rate remained at 6.5 percent, and the discount rate stayed
at 6 percent. Those two rates, which the Fed controls directly,
guide market rates that banks charge on consumer loans and pay on
savings deposits. But, in a rare inter-meeting move earlier this
month, officials slashed the funds rate to 6 percent and the discount
rate to 5.75 percent. Another 25 basis point discount rate reduction
followed soon after.
The Fed indicated its moves were designed to bolster
consumer confidence and stop a decline in sales and production of
goods. Many speculated it wasn't enough and that another 50 basis
point cut would be announced on Jan. 31, the second day of a regularly
scheduled two-day policy meeting.
Recession? What recession?
Since then, however, stock prices have
risen, the corporate bond market has loosened up and the potential
for President Bush's promised tax cuts to become reality has increased.
All of those factors could provide individuals and businesses with
enough additional money to spend so that economic activity rebounds
and aggressive Fed cuts won't be necessary.
"They're going to watch it carefully now
and move in small increments," Hoie says.
At the same time, further Fed cuts are all but
guaranteed, and that means borrowing should get cheaper for consumers
over the course of 2001. The Fed next meets on March 20, May 15,
June 26 and 27 and Aug. 21. Over the course of those gatherings,
the Fed should cut the funds rate all the way to 5.25 percent, according
to the Economic Advisory Committee of the American Bankers Association.
"The shallow growth in the first half of
this year may feel like a recession compared with the record expansion
rates of recent years," David Littmann, chairman of the ABA's
economic committee, said when releasing the group's forecast on
Jan. 24. But "the Federal Reserve's recent rate cut was a good
start. Two or three more cuts by midyear will help stabilize and
then boost the pace of economic activity."
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