Fed Expected to Cut Rates Again

There is no doubt the Federal Reserve, which has already cut interest rates four times this year in its fight against the specter of a recession, will slash its rates once again when it meets on Tuesday.

The real question is the extent of the rate cut —  and whether the Fed will cut rates again anytime soon after Tuesday.

Many economists, but not all, believe the rate cut will be half a point. And even those who see a half-point cut say the move may be the last large cut for some time.

``I think they've got to at some point say 'now we're going to wait for our previous rate actions to hit the market, to have an impact on real activity','' Brown Brothers Harriman senior economist Lara Rhame said.

``There is a limit to where the Fed can go,'' she said. ``There is a limit and I think we're close to that.''

Responding to a dramatic slowdown in the U.S. economy, the central bank has cut interest rates by 2 percentage points this year, bringing the federal funds rate —  the key interest rate that influences the cost of borrowing money for everything from cars to refrigerators —  to 4.5 percent.The series of cuts is the Fed's most aggressive rate-cutting effort since Chairman Alan Greenspan took office in 1987. 

If the Fed cuts interest rates by another half-percentage point on Tuesday, the federal funds rate will hit its lowest level in seven years.

There is little doubt the Fed will do just that. In a Reuters poll taken on Friday, all but one of the 25 primary dealers of government securities, firms that trade directly with the Fed in money markets, said they expected a half-point cut on Tuesday. One firm predicted a quarter-point cut.

The Fed is expected to announce the outcome of its meeting at around 2:15 p.m. E.T. on Tuesday.

The central bank last cut rates on April 18 after an emergency telephone conference call convened by Greenspan, the second time this year the Fed took the unusual step of changing rates outside its normal meeting schedule.

That move took a battered Wall Street by surprise and helped halt a steep selloff in stocks as investors gained confidence the economy will avoid a recession with a rebound in the second half of this year.

Unemployment Rate a Key Concern

However, many economists believe a rate cut Tuesday would not be the year's last. That's because the stronger growth is not expected to return soon enough to keep the unemployment rate from rising further. In April, the jobless figure jumped to 4.5 percent as companies shed the largest number of jobs in a decade.

The immediate worry is that further layoffs will again shake consumer confidence and cause the hoped-for rebound to stall out.

``There is no indication that things are getting better in the job market,'' said Mark Zandi, chief economist at Economy.com, a West Chester, Pa., forecasting firm. ``If the lost jobs and weaker income gains cause consumers to ratchet down, the economy could quickly fall into a recession.''

Zandi said he believed even if the economy begins to rebound this summer, the unemployment rate, which fell to a 30-year low of 3.9 percent last year, could well rise as high as 5.5 percent by the end of this year.

Many forecast a sixth rate cut at the Fed's June 26-27 meeting, although some said the move might be a quarter-point reduction, especially if the Fed signals a belief that it has finally done enough to boost economic growth without further rate cuts.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said the Fed may conclude a year from now that its final two rate reductions in this easing cycle were unnecessary and in fact had acted with tax cuts passed by Congress to overheat demand and raise inflation pressures next year.

``I think one more rate cut in June will be it for the Fed. After that, inflation is going to become more of a concern,'' Sohn said.

He predicted the economy, which grew at a sluggish annual rate of just 2 percent in the first three months of this year, is probably growing at an even slower 1 percent to 1.5 percent rate in the current quarter. But he forecast a rebound to 3 percent growth in the second half of this year as interest-sensitive sectors of the economy such as housing and autos respond to the Fed easing that began in January.

— The Associated Press and Reuters contributed to this report.