Fed Expected to Cut Interest Rates

Federal Reserve policy-makers are prepared to administer another bracing tonic to an ailing economy that's showing some signs of improvement: a sixth interest rate cut. But private economists are divided over what they believe is the right dosage.

Economists also are hopeful that the interest-rate cuts coupled with President Bush's signature on a $1.35 trillion tax relief bill would give a boost to economic growth in the coming months.

They predicted that the Fed's chief policy-making group, the Federal Open Market Committee, would cut interest rates for a sixth time this year at its meeting Wednesday. An afternoon announcement of the decision was expected.

But the economists were unsure whether the committee would order a sixth half-point rate cut, or a more moderate quarter-point move.

Regardless of the size of the expected cut, Lynn Reaser, chief economist at Banc of America Capital Management, says it could be the last. ``The economy should in fact start to show signs of stabilizing during the next two months as the interest rate cuts and tax cuts take hold,'' she said.

As a rough rule of thumb, the Fed's interest-rate cuts take between six and nine months to make their way through the economy. Its first rate cut was on Jan. 3, so that reduction wouldn't show up in economic activity until July at the earliest.

Tax-cut refund checks are expected to begin arriving in mailboxes next month and if people spend some of that money, as economists predict, that would perk up economic growth, too.

Wells Fargo's chief economist Sung Won Sohn also believes the Fed's credit-easing campaign could be coming to an end.

``Why not cut by half a point and be done with it. That is my expectation,'' Sohn said, adding that a smaller quarter-point move would likely disappoint Wall Street, sending stocks lower. ``I don't think the Fed wants to be in that position.''

But economist Clifford Waldman of Waldman Associates believes that risks to the U.S. economy, including economic turmoil overseas, increases the odds of future Fed rate cuts.

``Problems remain ... whether half-point or a quarter-point cut on Wednesday, I don't think it will be the last one,'' Waldman said.

The Fed's five cuts this year have pushed the federal funds rate, the interest that banks charge each other, from 6.5 percent down to 4 percent. The move has been matched by commercial banks, which have lowered their prime lending rate, the benchmark for millions of consumer and business loans, from 9.5 percent down to a seven-year low of 7 percent.

The Fed's decision Wednesday will depend on what carries greater weight: recent glimmers that the economy is starting to emerge from its yearlong funk, or concerns that the recovery could still be derailed if Americans suddenly grow worried about their job prospects and stop spending.

As Fed policy-makers opened their two-day meeting Tuesday, the government's latest economic reports depicted an improving economy: Consumer confidence rose in June to its highest point of the year, orders for big-ticket goods jumped in May and new-home sales were up last month.