预期美联储减息

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Expectations Vary for Fed's Move
Unusual Forces Complicate
Decision About a Rate Cut;
A Quarter or Half Point?
By GREG IP
December 5, 2007

With their forecast of economic recovery again endangered by economic turmoil, Federal Reserve officials next week are likely to deliver their third "insurance" interest-rate cut this year.

How big a cut and what to say in the accompanying statement are likely again to be difficult decisions, as they were on Oct. 31 when the Fed cut its short-term interest-rate target to 4.5% and issued a statement suggesting no more rate cuts were likely.


Futures markets expect at least a quarter-percentage-point rate cut and see a two-thirds probability of a half-point cut. Fed officials will likely consider the larger cut, but some might find it hard to justify when just a few weeks ago they thought they were finished cutting rates.

Some analysts say the Fed is more likely to deliver a quarter-point rate cut and drop from its statement last month's characterization of risks of weaker growth and higher inflation as equally balanced. That would implicitly leave the door open to additional easing, without leading investors to presume further cuts were coming.

Analysts also believe the Fed could improve the functioning of financial markets with either an additional cut in the discount rate -- at which the Fed lends directly to banks -- or by lengthening the terms of such loans.

The difficulty of next week's decision relates to the unusual forces weighing on the economy. Mounting losses at financial institutions related to complex mortgage instruments have sent stocks down, and made investors reluctant to buy all sorts of new debt, including mortgage-backed securities. Loan losses have eaten into bank capital at the same time banks have been forced to expand their balance sheets to absorb assets from defunct off-balance-sheet operations.

Banks are still able to lend: their capital will comfortably exceed regulatory requirements in all but the most dire scenarios. But they are less willing to make loans, possibly because the economy is getting weaker or because they anticipate more pressure on their capital ratios.

Banks are even reluctant to lend to each other; the London interbank offered rate -- the rate charged on short-term dollar loans, primarily between European banks -- has shot up, especially for loans extending beyond year end.

Fed officials' main concern isn't the current economy, though recent data have been on "the soft side," as Chairman Ben Bernanke said last week. Rather, it's that banks and other lenders, having already tightened mortgage-lending terms, will do the same with loans to small and medium-size businesses as well as credit cards and other consumer credit. Fed officials don't believe banks' reluctance to lend will go away after Dec. 31. And Mr. Bernanke warned that could "impose additional restraint on activity in housing markets and in other credit-sensitive sectors."

Officials can also imagine less likely but more damaging scenarios: that home prices fall more rapidly, sending defaults on mortgages up even more sharply, intensifying the credit crunch. A rate cut next week would probably be portrayed as insurance against significantly weaker growth, much as were the half-point cut in September and quarter-point cut last month. Officials are also mindful that surging energy prices could yet push up underlying inflation, though that threat would be further in the future than the threat to growth.

Most Fed officials thought they were finished cutting rates in the near term on Oct. 31, and several said so in unusually frank speeches afterward. But Mr. Bernanke and his closest advisers soon changed their mind, and gave speeches last week opening the door to further cuts. That has led to speculation about heightened dissent within the policy-making Federal Open Market Committee.

But Fed insiders, while conceding the earlier speeches came across as forceful, attribute the apparent contradiction with Mr. Bernanke's message primarily to the unsettled environment. They noted many officials change their minds when they hear staff presentations and the views of their colleagues inside the Fed meeting room.

Amid the turmoil in credit markets in August, the Fed halved the spread from a full percentage point, but that wasn't enough to overcome the stigma attached to borrowing from the Fed's discount window. Traditionally, banks have gone to the Fed for direct loans only as a last resort.

An alternative option would be to auction off credit at its discount window, as the Bank of England has done. Another would be to extend the term of discount-window loans to 90 days from 30 days.

The Fed could also follow the example of the Reserve Bank of Australia, which has targeted specific maturity dates in its "repo operations" -- short-term loans it and other central banks make to bond dealers. The European Central Bank is also lengthening the term of its repos, injecting