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A rate 3-peat for the Fed?
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November 17, 1998: 7:15 a.m. ET
Central Bank expected to cut key lending rates, again, at Tuesday policy meeting
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NEW YORK (CNNfn) - The Federal Reserve's policymakers are expected to cut borrowing costs for the third time time this year when they meet Tuesday, despite signs that the credit crunch that prompted the previous cuts is subsiding in a more stable global economy.
The U.S. Central Bank last notched down its key overnight Federal funds rate, by a quarter point to five percent, on Oct. 15, in a highly unorthodox move that came between formal sessions of the Fed's policy-making Open Market Committee.
Then, Federal Reserve governors cited "unsettled conditions" in global financial markets. The move followed an initial round of rate cuts on Sept. 29, amid fears that corporate earnings were on the brink of collapse, and Latin America was about to take a cue from Russia and default on its debt.
Though markets have so far managed to dodge a doomsday scenario, analysts say the Fed is inclined to trim rates further in a bid to stay ahead of the monetary curve.
"The consequences of taking the wrong course of action - in this case not cutting rates - are potentially greater than the cost of cutting rates," said John Ryding, the senior economist with Bear Stearns in New York.
Duty Bound?
With the economy still facing the risk of commodity price deflation, Ryding said, the Fed governors may feel almost duty-bound to deliver on a further rate cut that many investors have already factored into trading.
Stock markets around the globe ended on an upnote Monday in anticipation of further cuts of the Central Bank's two lending bellwether's, the discount rate and the federal funds rate.
The FOMC is expected to convene at 9 a.m. Tuesday for an open-ended deliberation on monetary policy. An announcement is expected in the early afternoon, at around 2:15 p.m.
Since the prior cuts, markets have staged a strong rebound amid broader signs that fears of a recessionary backslide in the United States may have been overdrawn. The liquidity crunch triggered by the bail-out of a troubled U.S. hedge fund, Long Term Capital Management, never reached the epic proportions some investors had initially feared.
In Japan, a sweeping new stimulus package worth about $195 billion has revived hopes for that country's moribund economy. Currencies are slowly stabilizing in some pockets of Asia.
In the U.S., the Dow Jones closed above 9,000 on Monday for the first time since July 30, stoking confidence that the bears have been sidelined.
Yet despite these gauges of recovery, economists note there are still reasons to be concerned. Job growth is ebbing gradually as the manufacturing sector continues to suffer a contraction in exports to Asia's anemic economies.
Some analysts say the Fed, cognizant of the remaining threat to U.S. economic well-being, will lower rates again as another pre-emptive strike against a downturn in the U.S.
"These problems have begun to improve, but they're far from resolved in terms of problems," said Bruce Steinberg of Merrill Lynch. "So the Federal Reserve has got to keep moving."
Furthermore, not cutting rates again could rattle investors who have been counting on such action to shore up confidence in the world's still-wobbly emerging markets.
The move would also second rate-cutting actions taken by monetary authorities in 13 other countries since the start of November.
In its Oct. 15 action, the Fed cut the federal funds rate and the discount rate by one-quarter of a percentage point each, pushing the Fed funds rate down to 5 percent and the discount rate, which is charged on emergency loans to commercial banks, to 4.75 percent.
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Federal Reserve Board
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