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Apr-29-2008

The Market Story Uneven Earnings Weigh on US Stocks

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WASHINGTON, April 27 (Reuters) - If the U.S. Federal Reserve wants to restrain oil and food prices and help downtrodden consumers, the best thing it can do is stop cutting interest rates. (More...)
With inflation being the main thorn in the ECB's side with respect to what to do with interest rates, continued lower levels may start to give Trichet and company room to address growth concerns via lower interest rates as we progress through 2008. (More...)
I like cross-border activity, but I don't like paying almost $10 for a box of cheerios. (More...)
The U.S. suffered a 16- month recession that started in November 1973 and almost doubled unemployment to 9 percent. (More...)
Despite expectations that the FOMC will then be finished with rate-cutting, Henderson said the market will first have to contend with more bad news on the data front. (More...)
"If you base everything off the core inflation rate, everything looks hunky-dory," said Robert Macintosh, chief economist at Eaton Vance. (More...)
Currently card companies are allowed to use outside factors to increase a customer's rate, including defaults elsewhere, decline in credit quality, or an increase in banks' costs of funds. (More...)
Finance Minister Jim Flaherty meets with the heads of the big banks today in Toronto. (More...)
For more mortgage rate news visit Future Planning Financial at www.fpf-direct.com. (More...)
You can find out how iShares Dow Jones U.S. Real Estate stacks up by clicking here under the Premium Features heading.) (More...)
In late New York trade, the New York Board of Trade's dollar index was down 0.2 percent at 72.595.DXY. The index, which tracks the dollar's performance against a basket of six currencies, advanced for three days last week. (More...)
Broad measures of the money supply are expanding rapidly. (More...)

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WASHINGTON, April 27 (Reuters) - If the U.S. Federal Reserve wants to restrain oil and food prices and help downtrodden consumers, the best thing it can do is stop cutting interest rates. That is the view emerging on Wall Street, among some economists, and even a handful of Fed officials who worry that the world economy is getting only limited benefit from deep rate cuts, but all of the unwanted side effects. Ending the string of rate reductions that began in September would be welcome news for the European Central Bank, which has held borrowing costs steady while its U.S. counterpart cut, driving the euro to a record high. It may also be good for developing countries struggling to pay for increasingly expensive food and fuel, and for rich nations worried about inflation eroding economic growth. The U.S. central bank is set to announce its next move on Wednesday and financial markets still expect a small cut, but the case for standing pat is picking up proponents. [1] The U.S. central bank, the Federal Reserve, is widely expected to trim interest rates to 2% from 2.25% this week to lift the troubled U.S. economy. Policy makers will begin their two-day meeting later amid signs that economic growth has stagnated, or even shrunk. It is thought that this could be the last cut for a while, after bold action from the Fed and White House has led to hopes that the worst could be over.[2]

HONG KONG (Thomson Financial) - The U.S. dollar weakened against the euro and the yen in the afternoon session in Asia on Monday ahead of this week's Federal Open Market Committee (FOMC) meeting and the release of first-quarter economic figures and jobless data for April. The FOMC, the policymaking body of the Federal Reserve, may cut its key interest rates by a quarter of a percentage point to 2 percent on Wednesday, said Mark Wan, chief analyst at Hang Seng Investment Services in Hong Kong. That will bring cumulative rate cuts to 325 basis points since September, when the Fed began easing its monetary policy after the subprime mortgage crisis erupted.[3] NEW YORK, April 28 (Reuters) - The dollar fell against a basket of currencies on Monday, breaking a three-day rally, as buyers retreated to the sidelines ahead of key economic data and the Federal's Reserve's policy meeting this week. Analysts said the dollar would likely stay confined to current trading ranges, awaiting a push from either the Federal Open Market Committee (FOMC) statement accompanying its interest rate verdict or first-quarter growth numbers, both due on Wednesday. The policy-setting FOMC is widely expected to cut the benchmark overnight lending rate by only a quarter of a percentage point to 2.0 percent at the end of a two-day meeting, and signal that its interest rate-cutting campaign is over for now.[4]

The policy'''setting FOMC is widely expected to cut the benchmark overnight lending rate by only a quarter to 2,0 percentage at the end of the two-day meeting. U.S. short term interest rates futures are showing the market perceives an 82 % chance that the Federal Reserve will cut interest rates by a quarter percentage point: Meanwhile, with global inflation rising, some analysts are speculating that the Fed could indicate it is approaching the end of its cycle of drastic interest rate cuts.[5]

DANGEROUS cross currents created by a stalling economy and rising prices may force the United States Federal Reserve to cut interest rates for the final time. The good news for the Fed - which began its two-day meeting overnight - are the growing signs investor confidence has been restored and financial markets have begun working again. Federal Reserve chairman Ben Bernanke has to balance deciding whether millions of U.S. homeowners lose their houses against cutting interest rates too far and sowing the seeds for an outbreak of inflation down the road.[6] Just ahead of a meeting of Federal Reserve policy makers this week, the widely shared consensus is that the Fed will most likely cut its benchmark short-term interest rate to 2 percent from 2.25 percent, signaling that while financial markets have stabilized somewhat, concerns about an U.S. economic downturn remain paramount.[7] A few months ago, many feared the credit crunch would put an end to the financial system as we know it and knock the world into recession. Those fears have not been borne out. It now looks as though it's the Federal Reserve's interest rate cuts that are nearing an end, while optimism that the dollar and stocks have hit bottom has increased. We at Action Economics are forecasting a quarter-point cut in the Fed funds rate target by the Fed Open Market Commitee (FOMC) at its Apr. 29-30 policy meeting, to 2.0%--a view widely shared by the rest of the market.[8]

LONDON, April 29 (Reuters) - The bank-to-bank cost of borrowing dollars fell and spreads over secured lending narrowed on Tuesday, as dealers bet that relatively stable money markets could mean the Federal Reserve's anticipated rate cut this week will mark a pause or even the end of its easing cycle. The Fed is widely expected to cut its federal funds target rate a quarter percentage point on Wednesday to 2.00 percent as the economy flirts with recession, a huge move down from 5.25 percent at the onset of the credit crunch in August last year.[9] WASHINGTON (AP) — The Federal Reserve is poised to deliver another interest rate cut to millions of people and businesses this week, although that could be the last break they get for a while. Fed Chairman Ben Bernanke and his colleagues open a two-day meeting Tuesday afternoon to take a fresh pulse on the economy and decide their next move on interest rates. The Fed is widely expected to lower its key interest rate by one-quarter percentage point to 2 percent at the end of its session Wednesday. That would mark a modest rate reduction after a recent string of hefty cuts.[10]

The Federal Reserve's "quick action," with Bear Stearns, liquidity, and interest rates, is due for some credit. Now would be a good time for "the Fed to rest on its oars after all the heavy rowing it's done since last summer," says Irwin Kellner in MarketWatch. The Fed is expected to cut interest rates a bit, to 2 percent, this week, but that should be the last cut "we'll see for quite some time."[11]

The Federal Open Market Committee headed by chairman Ben Bernanke is expected to cut the interest rates finally for some time on Wednesday, as worries about resurgent inflation rose, The Economist Times reported. According to the news reported, Peter Berezin, global economist at Goldman Sachs, said he believed the Fed didn't want to go lower than two percent, an interest rate that would provide considerable stimulus to the lagging U.S. economy. "We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions," Berezin said. "Obviously if the turmoil resurfaces, they will be apt to cut rates again. Barring that, they would like to stabilize rates." he added.[12] THE coming week is likely to bring another U.S. interest rate cut despite growing concern among economists that the Federal Reserve's monetary policy is doing little to stimulate growth - and a lot to flame inflation. With fuel prices hitting record levels and staples such as rice being rationed at U.S. retail giants Costco and Wal-Mart, Americans are suddenly living in fear that the worst thing to hit the economy in the next year might not be a recession.[13] The U.S. Federal Reserve is expected to cut its interest rates by a quarter point to 2.0 percent at a two-day meeting concluding Wednesday, said analysts according to a news reported at The Economist Times on Sunday.[12] WASHINGTON (AFP) — Even as an economic storm intensifies, the U.S. Federal Reserve is likely near the end of its interest rate-cutting cycle with policymakers awaiting the impact of a massive stimulus in the pipeline, analysts say. The Federal Open Market Committee headed by chairman Ben Bernanke is widely expected to trim its federal funds rate by a quarter point to 2.0 percent at a two-day meeting concluding Wednesday, say economists. Some Fed-watchers say this may be the last cut for some time.[14]

SYDNEY (Thomson Financial) - The U.S. dollar was trading mixed late morning on Monday in a narrow range after firming on Friday as opinion grew that the Federal Reserve might pause in its easing cycle after an expected quarter percentage point cut in the central bank's target funds rate this week.[15] "Americans have confidence in the Fed.'' Bernanke, 54, realizes he can't take tame inflation expectations for granted and needs to keep close tabs on price pressures. Traders in federal funds futures are betting such considerations will lead the central bank to take a break from cutting the overnight rate after reducing it a quarter percentage point this week. "It's most likely that they'll cut by a quarter point,'' says David Jones, author of four books on the central bank and chief executive officer of DMJ Advisors LLC in Denver. "But I wouldn't be shocked if they don't cut rates at all.''[16]

The market is expecting an 80 percent chance that the Fed will cut interest rates by 25 basis points,' said AB Capital Securities. AB Capital said a cut in the Fed's interest rates will help ease inflationary pressures as speculative traders in the commodities market may start to dispose of some of their dollar hedge positions. Caution is expected to cap gains as investors wait this week for a slew of reports on U.S. consumer confidence, first quarter GDP growth, manufacturing and construction spending, personal income and personal spending, and the labor market.[17] "You have to take the risk of the possibility of a small recession if you want to avoid ending up with a big one,'' says Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh. As policy makers meet this week to decide on interest rates, Bernanke has one big thing going for him that Volcker, 80, didn't: Polls show Americans, for the most part, are still convinced the Fed will do what it takes to keep inflation down. That may become a self-fulfilling prophecy, as workers refrain from demanding big wage increases they don't think they'll get, and companies limit price increases for fear of losing sales. Consumers expect inflation to average 3.2 percent during the next five to 10 years, according to a Reuters/University of Michigan survey this month. That compares with the 9.7 percent long-run inflation rate they expected in February 1980, seven months after Volcker took office. "It's very different now than it was then,'' says Lyle Gramley, who served as a Fed governor under Volcker from 1980 to 1985 and is now Washington-based senior economic adviser for Stanford Group Co., a wealth-management firm.[16] Any rally at home will also be difficult to sustain as investors continue to worry about the deteriorating outlook for the domestic economy, especially as accelerating inflation may compel the Philippine central bank to raise interest rates. Rising food and energy costs pushed Philippine headline inflation to a 21-month high of 6.4 percent in March, and economists said consumer prices are expected to keep rising, triggering calls for wage hikes and additional benefits for low-income families such as income tax exemptions.[17] The central bank's policy makers meet Tuesday and Wednesday to decide whether to lower interest rates again, and to issue an updated assessment of the U.S. economy and financial system. Most investors believe the Fed will lower rates by another quarter percentage point but will also suggest they are gearing up for a pause.[18] 'The currency market is fairly directionless ahead of the mega-data releases mid-week onwards,' said Thomas Lam, senior treasury economist at United Overseas Bank (other-otc: UOVEY.PK - news - people ) (UOB) in Singapore. The Fed will start its two-day meeting on Tuesday and will announce the outcome of its discussions tomorrow. The Fed is widely anticipated to lower its key interest rates by a quarter of a percentage point, the smallest reduction this year.[19] The expectation is of a quarter-point reduction to 2%, to be announced on Wednesday. This would be small in relation to the Fed's earlier moves, the last of which was three-quarters of a percentage point. It is also expected to mark the start of a pause in the cycle of rate cuts by the Fed, with some economists even talking of the possibility of higher interest rates by the end of the year to head off inflation.[20]

With oil prices at near $120 a barrel and the cost of staple foods, including wheat, corn and rice, vaulting ever higher, the Fed is likely to be paying close attention to inflationary pressures, analysts said. "The Fed's hope that falling oil prices will ease inflation pressures looks something of a remote one at this time," said John Ryding, Bear Stearns chief economist. "In short, fears of inflation are likely to limit the Fed's generosity on the rate front and we only expect a quarter-point cut on 30 April," he added. Others highlight a gloomy government report on new U.S. home sales for March, with sales the lowest since 1991 and prices tumbling by 13% on the previous year, and argue that the Fed cannot afford to stop cutting rates - though perhaps at a slower pace.[2] Nariman Behravesh, chief economist at Global Insight, said the Fed may want to take out more insurance against an economic meltdown and offer more rate cuts, albeit at a more gradual pace. "I think they will cut by 25 basis points and there is a chance they will cut again in June by 25 basis points," Behravesh said. "And then they will be done." Some fear that data such as the past week's grim reports on the housing sector may induce the Fed to stay aggressive. Reports showed sales of new U.S. homes plunged to their lowest level in over 16 years in March, with prices down 13 percent year-to-year.[14]

If so, it would be the third bubble the Fed has helped fuel since the mid 1990s: first in stocks, then in housing and now in commodities, says Tom Gallagher, senior managing director at International Strategy & Investment Group in Washington. Each bubble has had more of a direct impact on consumer prices than the previous one, he adds. The Fed's rate cuts have also undermined the dollar, which has fallen 7 percent against the euro this year. That is making imports more expensive -- they rose almost 15 percent in the year ending March 31, the biggest increase since the government began keeping records in 1982 -- and pushing up inflation. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, says the weak dollar makes it easier for U.S. companies to raise prices: "It's going to induce firms to push up mark-ups. That's bad for inflation.'' It was in the 1970s too.[16]

Soaring prices for food, oil (which almost reached $120 a barrel last week) and other commodities appear to be as painful for Americans as unemployment and the collapse of the mortgage market. The trends are certain to be a matter of lively discussion this week. "I think its going to be a contentious meeting," said Lyle Gramley, a senior adviser at the Stanford Washington Research Group and a former Fed board member. "There are lots of people on the board who have demonstrated they are pretty hawkish on inflation, and developments in the past month have given them ammunition." It is hardly new for the Fed to be caught in the middle of a quandary between the need to lower rates to stimulate the economy and the need to raise them to ward off inflation. Added to the concern is the plummeting dollar, which is spurring rising oil prices, since oil is priced in dollars and oil producers are unhappy when cheaper dollars cut into their income.[7] Fed Chairman Ben Bernanke and his colleagues are walking a tightrope. They are trying to shore up economic growth and at the same time they are mindful that they can't let inflation get out of hand. It's a bit of an economic dilemma: The very rate reductions the Fed depends on to energize the economy can also sow the seeds of inflation down the road. "It's a very challenging environment," said John Silvia, chief economist at Wachovia. In a nod to those conflicting forces, the Fed probably will opt for a moderate-sized rate reduction of one-quarter percentage point this week, Silvia and other economists predict. At its previous meeting on March 18, the Fed slashed rates by a hefty three-quarters point.[21] Meltzer says the rate should be at least 1 to 1.5 percentage points higher to keep inflation in check. Michael Niemira, chief economist for the International Council of Shopping Centers in New York, says the Fed is setting the stage for a "severe downturn'' in the economy in 2010 because its efforts to spur growth now will fan inflation next year.[16]

With the markets still betting on a quarter point cut, the reaction to standing pat at 2.25% could be ugly. Assuming there is a cut, the accompanying FOMC statement will have to not just signal a pause, but accommodate the views of inflation hawks such as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, who voted against the last rate cut. 'This is a case where words are going to speak louder than action,' said David Rosenberg of Merrill Lynch (nyse: MER - news - people ). That wasn't exactly how things worked out. By its December 11 meeting, financial market stress had become markedly worse. The balance-of-risks statement was replaced with 'increased uncertainty about the outlook for economic growth and inflation' and the Fed was setting up its Term Auction Facility for bank liquidity, which was announced the next day.[22] The first of $100bn of tax rebates to cash-strapped U.S. households were sent out on Monday as part of an economic stimulus package passed by Congress and signed into law by U.S. President George W Bush in February to boost flagging consumer spending. In view of these measures, combined with the risk of rising inflation, the Fed is likely to be cautious about further aggressive downward moves, analysts say. The Federal Reserve, like its UK and European central bank counterparts, faces a fine balancing act between lifting the heavy financial strain on banks, businesses and consumers to encourage economic growth - and keeping the lid on spiralling inflation.[2] Sure, it would suggest that the Fed believes economic risks are easing, but it would also indicate the central bank is growing more worried about the threat of inflation. The Fed has already cut rates six times since last September, and arranged lending programs to increase trading in the money markets the impact of those cuts and measures likely would take several months to be felt in the economy.[12] Rising inflation risks could also lead to a rate cut pause, analysts say. "We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions," said Peter Berezin, global economist at Goldman Sachs. The Fed has been slashing rates - on occasion between its official meetings - to bring them down from their peak of 5.25% last summer to their current level of 2.25% amid increasing signs that the U.S. is sinking into a recession.[2] The Federal Reserve's two-day FOMC confab begins today and the futures market's expecting a 25-basis-point cut in Fed funds to 2.0% when the meeting concludes tomorrow. After witnessing a string of cuts since last September, at a time when inflationary winds have been blowing harder, the chatter now is about whether this is the last reduction for this cycle. Leaning toward the view that this will be the end of the cutting is Peter Berezin, Goldman Sachs' global economist. Berezin told Agence France-Presse : We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions. Obviously if the turmoil resurfaces, they will be apt to cut rates again. Barring that, they would like to stabilize rates.[23] "There's a lot of production cost that has energy as a component. I think it's going to work its way into final goods and services prices." Dresdner Kleinwort chief economist Kevin Logan said not only were higher fuel and food costs squeezing profit margins in certain sectors, but they were affecting expectations. "Core rate inflation has been relatively tame; however the increases in fuel and food prices probably have an amplified effect on people's expectation of inflation," he said. "Because people buy food and fuel every day they see these prices every day, and that has more of an impact on their thinking than if an iPhone cuts $100 off their price or portable DVDs are half the cost. "The fact that it affects people's expectations, it can also affect their behaviour. This contributes to spiralling inflation and suddenly it becomes acceptable for there to be fuel surcharges on goods and services or higher prices. "It becomes a case of 'they charge more, then I have to charge more too'," Mr Logan said. With this in mind, he said, the Federal Reserve on Tuesday was likely to make its last cut to the federal funds rate for several months. "We thought for some time they would cut another 25 basis points, not 50, and that we were moving to the end of a rate cut cycle," Mr Logan said.[13] WASHINGTON (AP) — Battling risky economic crosscurrents, the Federal Reserve is ready to bump down a key interest rate again to brace the wobbly economy. That rate cut could turn out to be the last one for a while as zooming energy and food prices heighten inflation concerns.[21] WASHINGTON (Reuters) - The Federal Reserve looks set to deliver a small interest rate cut on Wednesday to help an economy moving sideways at best and could signal the move is the last in a cycle as officials eye inflation warily.[24]

What started as cautious whispers that the worst of the credit crisis might be over have grown louder. Global stock-market indices hit a three-month high last week, led by Wall Street, while worldwide bond issuance this month is up by 25% on March. Traders and analysts are betting on a cut in interest rates when the Federal Reserve meets this week, but they also think America's central bank is through the emergency phase of its interest-rate cuts.[20] MANILA (Thomson Financial) - Philippine shares are expected to open slightly higher on Monday after a mixed session on Wall Street and on expectations the Federal Reserve will cut interest rates this week.[17]

We are on the cusp of an economic crisis, one that I hope the Federal Reserve's Open Market Committee considers when it votes on whether to cut interest rates again this week.[25]

After a year of aggressively slashing interest rates, Federal Reserve policymakers are widely expected to use this week'''s meeting to signal that their rate-cutting days may soon be over ''' for now.[26]

NEW YORK (Reuters) - The dollar may lurch higher on Wednesday if the Federal Reserve signals an end to its campaign of slashing interest rates, but a rally would soon fizzle if April's jobs report comes in well below forecasts. The dollar has appreciated in recent days on expectations that the Fed, in its statement after a two-day policy meeting, may suggest it is ready to stop cutting rates for now.[27] NEW YORK, April 28 (Reuters) - The dollar's rally stalled on Monday as investors bought euros to square up positions ahead of a key policy meeting by the U.S. central bank later this week. "The market is holding its breath ahead of the Fed tomorrow, so we are not surprised to see the dollar a little lower here after a strong performance last week," said Matthew Strauss, senior currency strategist, at RBC Capital Markets in Toronto. "For the first time in a number of FOMC (Federal Reserve Open Market Committee) meetings, there is significant uncertainty about the decision and the statement," he added.[28] Investors were awaiting the outcome of a two-day Federal Open Market Committee (FOMC) meeting set to open later Tuesday, with most analysts expecting a quarter-point cut in the base lending rate to 2.0 percent and a signal that the central bank is ready to pause after aggressively cutting rates since September.[29] Asian shares closed mixed on Tuesday as investors sat on the sidelines ahead of the outcome of the two-day Federal Open Market Committee (FOMC) meeting which ends tomorrow. The FOMC is expected to further cut its key rate at the end of its two-day meeting but will likely signal a pause from its easing bias going forward amid heightened concerns about soaring inflation. 'This seems to be the end of a (rate) lowering cycle. Inflation is heating up and the Fed will not be able to keep on this path any further,' said Francis Lun, general manager of Fulbright Securities in Hong Kong.[30] With oil prices staying close to the $120 a barrel mark, inflation is a significant worry and now will be just the time for U.S. rate setters to communicate the fact, many belive. "Traders are reluctant to be exposed to shorting the U.S. currency ahead of Wednesday's FOMC (Federal Open Market Committee) decision, which may signal the Fed's intention to pause its eight-month-long easing campaign," said Ashraf Laidi at CMC Markets. "Rather than stating its intention to bring an end to the rate cuts, the FOMC will likely communicate a change of tack by making a reference to stabilizing market conditions, leading market participants to expect a reduction in the easing momentum," added Laidi.[31]

The annual pace of inflation has more than doubled to 4 percent since August. Traders in interest-rate futures saw that Federal Reserve would halt its cycle of interest-rate reductions as soon as this month's policy meeting. They gave about a 25 percent chance the Fed would keep its main rate unchanged at 2.25 percent on Wednesday after six rate cuts since September.[12] All eyes are on the Fed,' said Fujii. The Bank of Japan is not expected to change its policy rate from 0.5 percent after Wednesday's meeting, though data showing a rise in core inflation was likely to put more focus on the meeting, NAB Capital Markets chief economist Rob Henderson said. John Noonan, a senior foreign exchange analyst at Thomson IFR, said the direction of the foreign exchange market this week would largely be determined by scheduled events.[3] On the positive side, tax rebates of $330 to $1,200 per individual are due to be posted on Monday, forming the centrepiece of the federal government's $168 billion fiscal stimulus package. The Bank of Japan is not expected to change its policy rate from 0.5 percent after Wednesday's policymakers' meeting though data showing a rise in core inflation was likely to put more focus on the meeting, Henderson said. John Noonan, a senior foreign exchange analyst at Thomson IFR, said the direction of the foreign exchange market this week would largely be determined by scheduled events.[15]

With inflation being the main thorn in the ECB's side with respect to what to do with interest rates, continued lower levels may start to give Trichet and company room to address growth concerns via lower interest rates as we progress through 2008. After the EUR big reversal off of 1.6020 last week, this data is providing more support the USD this morning. The Kiwi dollar is getting hammered this morning with New Zealand trade balance deficit reported at -.05B, substantially missing expectations of +.40B. With the highest benchmark rate of the major central banks, New Zealand may well shift their policy from holding to cutting interest rates in the near future. [32] If foreign holders of dollars or dollar-denominated assets sell them, all the good effects of being the de facto international reserve currency start operating in reverse. Until fiscal and monetary policies change, all this implies future inflation and higher interest rates. The bottom line is this: the Fed should bury its errant Phillips Curve framework, and cease attempts to fine-tune perfect balance between inflation and recession. It should halt further rate cuts and soon begin a series of interest rate increases.[33] Today at least, the data is showing that the theory of "economic decoupling" between the U.S. and other economies seems to have little footing. Fed meeting tomorrow: Preview After the significant reduction in interest rates, where over the course of the last eight months the Fed has lowered the benchmark from 5.25% to 2.25% in an effort to jumpstart the domestic economy, the market is now expecting that the Fed will be close to done with this expansionary cycle. If they do in fact bring the overnight rate target to 2.00%, and potentially to 1.75% at a later meeting, there is not much room for them to go further as real interest rates threaten to turn negative at these levels. Interest rate policy has a lagged affect on the economy and although much trouble is still ahead, these cuts should start to have an affect, especially if the credit market regains normality and borrowing can actually become more affordable.[32] Since September the Fed has consistently lowered the short-term interest rate in order to stimulate credit markets and the economy. "In a very compressed period they have been lowering the rates 325 basis points," Mr Logan said. "They've moved fast and instituted a number of other innovations that are affecting financial market liquidity." Mr Logan said, there were signs that Fed chief Ben Bernanke believed he had reached the limit in terms of what interest rate cuts could do to counter the downturn. "They're indicating that there is only so much money policy can do. They are passing the baton to fiscal policy," he said.[13] We had meatier issues to discuss. I talked to McTeer at length about Fed policy last August, before the first round of rate cuts, and I wanted to get his assessment eight months and six cuts later. Interest rates are 3 percentage points lower than they were then, but it doesn't seem to have helped our slumping economy. "The Fed's done a pretty good job of adding liquidity, but it's not been that effective so far," McTeer said.[25] A growing number of economists now believe the economy probably will contract in the current April-to-June quarter. Many analysts also now think the economy will manage to eke out a barely noticeable 0.4 percent growth rate during the first three months of this year as opposed to falling into negative territory as some had previously thought. The government reports on the first quarter's performance on Wednesday — the same day the Fed's decides its next move on interest rates. Even if the economy heals in the second half of this year and into 2009, the unemployment rate, now at 5.1 percent, is likely to rise, perhaps reaching close to 6 percent early next year, analysts said. Job losses for the first three months of this year neared the staggering quarter-million mark.[21] Economist Ethan Harris at Lehman Brothers said the Fed's easing cycle "is far from over" even though the pace may slow. He expects a quarter-point cut on Wednesday and more cuts in December, January and March to bring the funds rate to a low of 1.25 percent. "It is true that in normal times, the 300 basis points of Fed easing thus far would be quite stimulative, adding more than three points to GDP (gross domestic product) growth in the second half of this year," he said. "However, these are not normal times.[14] WASHINGTON (Thomson Financial) - Financial markets and most economists are predicting that the Fed will make a quarter point cut in its target Fed funds rate to 2.00% on Wednesday and accompany that with some wording in the statement signalling a pause for the foreseeable future.[22] A stable currency and low inflation lessen the need for complex hedging vehicles which can be leveraged to harmful effect in volatile markets. Unfortunately, with total first quarter job losses up to 232,000 and the University of Michigan Consumer Sentiment Survey at its lowest level since 1982, fed funds futures indicate a strong likelihood of a cut of 25 basis points in the fed funds rate.[33]

The Dec '08 contract, for instance, currently prices Fed funds at roughly 2.0%. If the Fed cuts by a quarter point, 2.0% Fed funds at the end of the year would represent the longest stretch of interest rate stability for this series since Bernanke and company kept rates at 5.25% for the 15 months through September 2007.[23] Some analysts suspect, with the U.S. housing recession deepening and its impact still spreading, the Fed will get at least one more kick at the interest rate can Wednesday, though some suspect the cut will be a modest quarter point.[34]

Rishi Sondhi, economist at RBC Financial Group, said that with housing so weak, "the Fed will likely see the need to cut interest rates further." "We continue to lean towards 50 basis points coming next week followed by 25 basis points in June," he said.[14] Despite also pumping more than $US900 million into the financial system the Fed's problems have continued to mount as the U.S. slips into a recession. Economists are forecasting the Fed will this week cut rates by another 25 basis points to 2 per cent - its lowest level since 2004 - and keep rates low until 2009.[6] "The Fed hawks will vote 'no' on a further rate cut, but there should be enough doves, including the chairman, to get agreement on a 25-basis point reduction (100 basis points equals a percentage point)," said CIBC World Markets economist Avery Shenfeld. While Shenfeld expects the statement accompanying the U.S. rate cut will not promise any more relief, he suspects more will be coming. The reason for the need of more rate cuts is the economic news will get worse before it gets better, he said.[34] Some economists say the Fed has already cut too deep, after slashing the benchmark rate by 3 percentage points since September to 2.25 percent.[16]

Fed Chairman Ben Bernanke and his colleagues have lowered benchmark overnight lending rates 3 full percentage points to 2.25 percent over that span. Policy-makers meeting on Tuesday and Wednesday look set to lower them by a slim quarter point and then step aside to see whether their handiwork has the desired effect in spurring an economy socked by a housing slump and credit market disarray. While officials still worry about downside risks for the economy, which they think may be facing recession, they also are concerned forecasts for an ebbing in inflation may prove off track.[35] "There was some fear of recession, the oil price went skyrocketing up, the dollar was very weak.'' It took Volcker's effort as Fed chief to push the overnight lending rate to 20 percent in 1980 and drive the economy into its deepest decline since the Depression to break the inflation he inherited. To avoid squandering the gains Volcker made, Bernanke may need to stop his all-out effort to prop up the weakening economy and start paying more attention to countering price pressures.[16] Oil prices, which also have been hitting record highs, moved closer to $120 a barrel on Monday. Food prices are up 5.3 percent on an annualized basis in the first three months of this year, outpacing the 3.1 percent rise in overall inflation. If the Fed does drop its key rate to 2 percent and holds it there for some time, that would still be low enough to provide relief to stressed homeowners facing a rate reset to their adjustable-rate mortgages, McBride said.[21]

Chris Tennent-Brown, ASB economist, said wages would play a big role in the Reserve Bank's decision when to drop the rate. If rising prices are translated into higher wage demands, this could delay an OCR cut. Tennent-Brown said economists would be looking closely at wages data for the first quarter of this year when it the figures came out in May. "If the labour market index is continuing to set record highs, I think it's a tough environment for the Reserve Bank to be cutting rates, whereas if they think there are problems in the labour market, and wage inflation isn't going to be an issue, I think that gives them room to move."[36] Deutsche Bank economist Mustafa Chowdhury said the Fed must be concerned about destabilizing effects of a further fall in the dollar that could result from more rate cuts. "The falling dollar and rising inflation increases the likelihood that the Fed is near the end of its easing cycle," he said in a note to clients.[14] Beyond what the Fed does, economists and specialists will be looking for what it says. Of particular interest is whether the Fed hints that this might be the last rate cut for a while, as many experts think, on the ground that further reductions will fan inflation and send the dollar to new lows.[7]

Soaring prices for oil and food have fed a global inflationary surge, sparking food riots in some countries. "The Fed's intention to pause its easing cycle may be part of an international effort to stabilize the falling value of the dollar, in light of the deteriorating state of world food prices," said Ashraf Laidi, chief foreign exchange strategist at CMC Markets U.S. in New York. A Reuters survey on Friday of the 20 big bond firms that deal directly with the Fed in the markets found that all of them expect a quarter-point rate cut this week.[35] In order for the Feds to raise rates we would first need to see the U.S. dollar strengthen as well as gaining control of energy and commodity prices. The aggressive cutting of rates has also helped those with adjustable rate mortgages as most ARMs reset to prime plus a margin which is determined during the negotiating process of obtaining a mortgage. That rates cuts save a homeowner facing their adjustment in their mortgage rate would save over $300 a month today compared to December 2007 on a $200,000 mortgage loan.[37] Rate cuts take a number of months to have any effect and the Fed has voiced hope they could help to spark a recovery in the second half of the year. It has also been lending billions of dollars to banks that are wounded from the sharp fall in the value of investments linked to the slumping U.S. mortgage market and keen to sit on their cash. This has caused the sharp increase in the rate that banks charge each other for money, which many have passed on to their customers in the form of higher mortgage rates and personal and business loans.[2] Rate cuts can be effective economic stimulants, but repeated cuts have diminishing returns, McTeer said. "A slight difference in the interest rate doesn't seem to be all that important," he said. Other Fed actions such as allowing investment banks to borrow from the discount window ' a figurative term that refers to the discounted rate at which the Fed loans money to banks ' seem to have helped more. McTeer said he thinks the Fed, while slow to act on the signs of a slowdown last summer, has responded well since then. It takes a while to determine the economic impact of rate cuts.[25] The Fed has already cut interest rates to 2.25 percent from 5.25 percent in six steps since mid-September in an effort to keep U.S. economic activity going in spite of a credit crunch and a deep housing downturn.[24] "A quarter-point reduction is a nice segue to that transition. Short-term interest rates could stay low longer than many currently expect," he added. The Fed's rate cuts — which take months to work their way through the economy and affect activity — along with the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses — should help strengthen the economy in the second half of this year, Fed officials said.[21] The Fed has no intricate machinery for tending the economy. It has "one big lever," McTeer said, referring to interest rates. "It's got to make a choice between a major financial market crisis or being more diligent on inflation," he said. If it chooses the former, it cuts; if it chooses the latter, it raises.[25] Mr. Goodfriend's paper presciently foreshadowed the Fed's current situation. Since August it has sold off or lent out half the $800 billion in Treasurys on its balance sheet in return for less liquid loans and securities to restore normalcy to credit markets. It faces the prospect, though small, of using up the remainder if the credit crisis worsens. It could expand its balance sheet without limit if it was willing to let the federal funds rate fall to zero (what the Bank of Japan called 'quantitative easing' when it tried that strategy). That could fuel inflation or create other distortions in the financial market.[38] With a host of Fed liquidity measures already undertaken and banks' already having announced huge writedowns, financial markets expect rates will bottom out at 2 percent as the Fed shifts focus to inflation from growth. Morgan Stanley revised up its fed funds rate trough to 2 percent from 1.75 percent.[9]

A quarter-point reduction would drop the Fed's key rate for influencing national economic activity to 2 percent. This rate, called the federal funds rate, is what banks charge each other on overnight loans and affects a wide range of interest rates charged to people and businesses.[21] The Feds involvement came in the form of an emergency $29 billion loan in return for collateral in the form of mortgage-related securities of uncertain value. It was then that the Fed lowered its federal funds rate - the rate for overnight loans between banks - by three quarters of a percentage point, to 2.25 percent.[7] The Congressional Budget Office estimated that the cost in the first year would be $253 million, rising to $308 million by the fifth year, for a total $1.4 billion over five years. It based that estimate on the assumption that the federal funds rate would average 4.5% from 2008 to 2016 and the Fed would pay interest at a rate 0.1 to 0.15 percentage points below that. It projected required reserves of about $8.3 billion.[38]

The Fed has already trimmed the key federal funds rate by 3 percentage points since last summer to 2.25 percent from 5.25 percent in order to prevent a further slowdown in the world's biggest economy.[17]

'The Fed can't afford not to cut rates further because the U.S. economy is really weak,' said Hang Seng's Wan. The International Monetary Fund this month cut its 2008 growth estimate for the U.S. economy to 0.5 percent from 1.5 percent.[3] Many on Wall Street expect the Fed's Open Market Committee to serve up only a quarter-point cut Wednesday when it ends a two-day session. That would leave the benchmark for overnight loans between banks at just 2 percent ''' down from 5.25 percent when the rate slashing began last summer. While some Fed watchers say we may see one more cut to follow, most expect the Fed to pause and see if its easy-money policy has the desired effect of boosting a sagging economy ''' without setting off another upward price spiral.[26] The economy outside the housing sector is not as weak as many economists had feared. Add to those factors a $168 billion fiscal-stimulus plan, 300 basis points of rate cuts already in the system, and indications that more rate cuts may not be the answer to financial-market ills, and it's no wonder that recent speeches from Fed officials have indicated more caution on monetary policy easings.[8]

With some economic data coming in slightly above forecasts and financial markets showing signs of stability, analysts expect the Fed's policy-making Federal Open Market Committee (FOMC) to cut the overnight lending rate by a scant 25 basis points on Wednesday.[27] The case for waiting is buttressed by financial market improvements, the Fed's assorted liquidity operations, global commodity price threats and the stimulus package rebates going out beginning today. It's a strong enough case that markets are pricing in about a 25% chance the Fed won't make any rate cut at all. Although he agrees with the quarter-point forecast, Brian Sack of Macroeconomic Advisers says 'the FOMC will likely debate whether a rate cut is needed at all.[22]

The Fed has cut rates 3 full percentage points since last October all in an effort to avert a recession, recapitalize the financial markets and make lending more affordable so that Americans and overseas investors would buy our real estate.[39] Although the economy is believed to be barreling toward recession, a number of steps have been taken to mitigate the downturn. The Fed has already slashed rates by three full percentage points since September, and the impact of those cuts likely will take several months to be felt in the economy.[14]

Commercial banks in Canada are showing an increasing reluctance to pass on the central bank's rate cuts, and further Fed cuts are expected to run into opposition from members who are starting to fear inflation more than recession.[34] Some now question whether the Fed will ease at all. Earlier this month, by contrast, debate was swirling over whether the central bank would cut rates by 50 or 75 basis points.[8]

The late Fed chairman Burns, who ran the central bank from 1970 to 1978, responded to inflationary pressures by raising interest rates to more than 10 percent.[16] Britain's currency was up against the dollar and euro after the day's trade and on Tuesday attention will turn to Bank of England governor Mervyn King's appearance before the UK Treasury Select Committee for hints on the path for interest rates. Elsewhere, the dollar got off to a good start, with most of its gains from last week staying intact as attention turned to Wednesday's pronouncements from U.S rate setters. Expectations are running high that the Fed will signal an end to its rate cutting stance, having slashed borrowing costs by 300 basis points over an 8-month span.[31] On Monday the USD fell against a basket of currencies, breaking a three day rally. '''The market is holding its breath ahead of the Fed on Wednesday, so we are not surprised to see the USD a little lower after a strong performance last week,''' said a currency strategist. Analysts said the USD would likely stay confined to current trading ranges, awaiting a push from either the Federal Open Market Committee (FOMC) statement accompanying its interest rate finding or first-quarter growth numbers.[5] 'The FOMC and the data will determine the next move in the foreign exchange markets, but sentiment is certainly more positive towards a correction in the U.S. dollar than has been the case for a while,' said John Noonan, a senior foreign exchange analyst at Thomson IFR Markets. The U.S. is due to announce this month's jobless figures. 'This is the biggest week of the year so far for U.S. data, with major releases due in Europe, so it is no surprise that the market has paused for a breath,' said Noonan. UOB's Lam said the Fed will likely keep its rates on hold between May and March 2009. In the meantime, the Fed may resort to other tools to ease the credit crunch, including raising the volume of its regular Treasury auctions.[19] 'The FOMC meeting promises to be a major event in that it is expected to signal the end of the dramatic easing cycle the Fed has been on since the credit crisis stormed through,' said Noonan. He said there was a lot of new-found optimism on Wall Street with many saying that the end is near for the U.S. moving into recession, though this view would be severely tested later in the week when the payroll data is released.[15]

The further bad news will start with a report Wednesday that is expected to reveal there was "zero" growth the U.S. economy in the first quarter and will be followed by the April employment report Friday, showing another 100,000 jobs gone. The Bank of Canada, which this past week cut rates by a further half-point and said it expects there will be more rate cuts down the road, has until its next rate review meeting in June to decide how much more to cut.[34] 'The U.S. economy is probably already in recession but tax rebates and the lagged effect of lower interest rates should lead to better growth in the second half of the year,' Henderson Global Investors said in a note to clients. 'Other regions are likely to see a slowdown in growth in 2008 as a result of higher oil prices, higher interest rates and the credit squeeze. Growth in emerging economies should remain strong by historical standards, but they will not prove completely immune to the global slowdown,' it said.[30] Ethan Harris, an economist at Lehman Brothers, considers that rates could fall to 1.25% by next year. "The only part of the policy transmission mechanism that is working is the weaker dollar helping to sustain solid export growth," he said. "The other channels of policy - market interest rates, asset prices, and bank lending - are either clogged or working in reverse," he added.[2] Economists pored over the wording of the bank's press release for clues about when rates relief will finally arrive. They noted the bank was now saying the rate would stay where it was for "a time yet" - not "a significant time yet" as it said six weeks ago. The change in tone has prompted some bank economists to bring forward their predictions of when interest rates will drop. Kiwibank moved straight away to slash its two-year lending rate to 9.29 per cent from 9.60 per cent, with the proviso that borrowers have 20 per cent equity in their purchase. Economists at ASB Bank brought forward their prediction of when the OCR would drop from early next year to this December, although they were not yet forecasting if the cut would be 0.25 or 0.50 per cent.[36]

On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to send out tax rebates. NAB Capital Markets chief economist Rob Henderson said he expects the FOMC to cut the funds target rate to 2.00 percent.[15] In Apr. 28 trading, Fed funds futures reflected between 75% and 80% for a quarter-point rate cut at the Tuesday-Wednesday FOMC meeting, from slightly lower odds evidenced last week.[8]

Rate cuts alone, though, won't restore rationality to the credit markets. McTeer said he thinks the Fed may opt for a quarter-point cut in the Fed funds rate at its Wednesday meeting.[25]

'While the committee is widely expected to reduce the target fed funds rate by 25 basis points to 2 percent at the upcoming meeting, it would be incorrect to judge the more curtailed move as an attempt by policymakers to scale down the extent of policy accommodation,' said Lam. 'The Fed is merely tailor-fitting its policy to provide continued accommodation via other tools, which include the ongoing liquidity provision programs and possibly other less conventional measures,' he said.[19] NAB said traders were pricing in a 78 percent chance of a 25 basis point rate cut and a 22 percent chance of no change in rates. 'There's also speculation that that the Fed may signal a pause in its easing cycle,' it said.[19]

The Federal Reserve will probably announce a 25 basis points rate cut on Wednesday to 2%, completing the seventh rate cut since august last year, pointing out to remaining concerns over the U.S. slowdown. Although for some experts there is still a possibility of a surprising decision, the fear of entering a recession later this year.[40] CHICAGO (Reuters) - The U.S. Federal Reserve is expected to put an exclamation point on its string of interest- rate cuts with a small reduction this week and may signal that its rate-cutting cycle is done for now.[35] Inflation will play a major role in how the Federal Reserve decides how to handle the next rate cut and following rate cuts. It could be possible that the Federal Reserve leaves rates at 2.25 percent to test market reaction, but it is more likely to see a 0.25 percent reduction in rates on Wednesday. If the Federal Reserve does lower rates on Wednesday it is expected that they will indicate a hold on further rate cuts to help fight inflation.[37]

Economists say it takes 6 months to a year to feel the affects of a Federal Reserve Banks' cut in rates.[39] U.S. Dollar gains on rate outlook The Dollar has done well overnight as traders place bets on a rather tame 25pt cut for the the Federal Reserve meeting tomorrow at 2:15 EST. The feeling is that there could be one more moderate cut, but we will be on a wait-and-see basis over the coming months depending on the data.[32] HONG KONG (Thomson Financial) - The U.S. dollar moved in a narrow range versus the euro and the yen in the afternoon session in Asia on Tuesday as investors waited for the outcome of the Federal Reserve meeting and a string of U.S. economic data due out this week.[19] Stocks slipped Tuesday as the Federal Reserve's rate committee began its two-day meeting, an event highly anticipated by investors, who also digested a round of mixed corporate news and economic data.[41] NEW YORK (AFP) — Wall Street stocks drifted in a tight range in opening trade Tuesday with investors hesitant ahead of the first estimate of U.S. economic output in the first quarter and a Federal Reserve policy decision.[29]

New York - In the past eight months, the Federal Reserve has embarked on the most aggressive interest-rate reductions since 1982, when America's central bank decided it needed to jolt the economy out of a recession with a massive infusion of money.[42] Sure, it would suggest that the Fed believes economic risks are easing, but it would also indicate the central bank is growing more worried about the threat of inflation. It is not uncommon for inflation to flare up in the early part of a recession, and then pull back as the economy weakens further.[18] The Fed is expected to make one more quarter-point drop. But economists anticipate that the central bank, which is chaired by Ben Bernanke, will then pause and reassess the economy. Wall Street will be particularly anxious to see how the Fed explains its actions: whether the pause is because the central bank sees an economy on the mend or because its focus is shifting to inflation concerns.[42] Rising global inflation and the Fed's hope that a blend of monetary and fiscal stimulus will shore up the anemic U.S. economy suggest the central bank is ready to pause in the sharp easing cycle it kicked off in mid-September.[35]

While the Fed may have flooded the market with cash, banks aren't exactly eager to lend it out, reducing the potential inflationary impact. That's not to say there's nothing to worry about. For one, while a slowing U.S. economy has been enough to check inflation in the past, heavy demand from fast-growing economies like India and China may stand in the way of that happening this time around.[43]

The expected cut also assessed to be the last cut for some time however the economy is believed to be moving towards recession. Fed's decision also important since it will reveal its choose between financial market and diligency on inflation.[12] With some signs financial markets are stabilizing, Fed officials expect the combined effects of rate cuts and a $152 billion government stimulus package to revive the economy.[24] Choosing to cut rate will show that Fed is still concerning more about financial market than increasing inflation.[12] After the housing bust triggered a broad credit crisis, the Fed answered again with steep rate cuts. That measure may have been necessary to prevent a financial meltdown, but it also could make higher inflation a greater possibility.[43]

What I don't understand is what the Fed can do about inflation and job losses. The Fed, in my mind, cannot and should not continue to cut rates after this week.[39] Dallas Fed President Richard Fisher, who voted against the last two rate cuts, says persistently rising food and energy costs are starting to influence consumers' inflation expectations.[16]

Commodity--especially oil--prices drove inflation in the 1970s. When the Fed eased monetary policy to accommodate this, the general price level took off, and workers demanded compensation. When the Fed raised rates after its 2001-02 post-"tech bubble" easing, markets reacted by using increasing leverage to achieve desired returns, since they were confident the Fed could control inflation and keep interest rates low.[44] Paying interest on reserves would allow the Fed to separate interest rate policy from liquidity and financial stability policy, JPMorgan economist Michael Feroli said.[45] Even if the Fed stops lowering interest rates, some economists believe the central bankers will still have to continue addressing the availability of credit. "The Fed is not getting traction with these aggressive rate reductions because of the credit crunch," Mr. Gramley says.[42] Short-term interest rates could stay low longer than many currently expect." Even as economists predict the Fed is likely to wind down its rate-cutting campaign any sign that the recession is deeper and longer than forecast could prompt another round of rate cutting.[6]

Investors will be watching the Fed's statement after the meeting to get a clue of the future direction of interest rates. Most analysts were speculating that the Fed has reached the end of its rate-cutting cycle. At 1:00 p.m. (0500 GMT), the euro was trading at $1.5653 from $1.5652 in Sydney this morning.[19] 'The high degree of uncertainty over whether the U.S. will actually register negative growth and just what the Fed will do and subsequently say regarding the future course of interest rates is big enough to cause most to prefer to sit and watch TV than play around with positions in a thinner than normal market,' Copsey said.[19] Rapid growth in liquidity guarantees inflationary pressures. The U.S. dollar is the de facto international reserve currency; as the demand for dollar-denominated assets such as U.S. Treasurys bids up their price, the interest rate the Treasury has to pay to borrow declines.[33]

There are signs the Bank of Canada and the U.S. Federal Reserve are running out of room to deliver further interest rate relief to their economies.[34] Battling risky economic crosscurrents, the Federal Reserve is ready to bump down a key interest rate again to brace the wobbly economy.[10] When the tech bubble burst in 2000, the Federal Reserve responded by slashing interest rates. That move helped keep the economy afloat, but it helped fuel another bubble in housing.[43]

A pending proposal from the Federal Reserve Board would prevent credit card companies from raising interest rates on customers' existing debt for any reason other than a default on the card account, several sources said Monday.[46]

Federal Reserve officials on Wednesday will discuss the implications of paying interest on commercial-bank reserves, a step that would give the Fed considerably more capacity for combating the credit crunch. In an announcement on its Web site Monday, the Fed said "the implications of interest on reserves for monetary policy implementation" will be discussed at a meeting of the Federal Reserve Board on Wednesday. Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed. They earn no interest on those reserves.[47] WASHINGTON (Reuters) - The Federal Reserve's Board of Governors will hold a closed meeting on Wednesday to discuss paying interest on bank reserves, one of a number of options officials have been mulling to address liquidity problems in financial markets in case measures taken to date fail to gain traction. The Fed announced meeting on its website on Monday.[45] At issue is the meeting Tuesday and Wednesday of the Federal Open Market Committee, the Feds monetary policy-making panel, which consists of the Feds board of governors and the presidents of the regional Federal Reserve banks. A month ago the committee met on the heels of the Feds stunning participation in the fire sale of the investment bank Bear Stearns to its larger rival JPMorgan Chase, an action that Bernanke defended as necessary to avert turmoil in the financial markets and the possible collapse of financial institutions around the world.[7]

Fed easing. As the U.S. Federal Reserve does not have an inflation target and couches its price stability mandate over a long horizon, it can allow inflation to rise without formal constraint.[44]

'''Fears of inflation are likely to limit the Fed'''s generosity on the rate front,''' said Bear Stearns chief economist John Ryding. Those fears have been fueled by a continued surge in oil and gasoline prices.[26] Foreclosures have surged to record highs, financial companies have wracked up multibillion losses and all the fallout has sent the economy reeling. Even as economists predict the Fed is likely to wind down its rate-cutting campaign this year, they said the Fed would lower rates again if there were worrisome signs that the economy was faltering even more than expected.[21] If the Fed does signal a pause in lowering rates, however, it will not be welcome among many who feel that, with problems persisting in the housing sector, the dangers of a deepening slump should be the highest priority. "Its our core view that financial conditions remain very stressed," said Lewis Alexander, chief economist at Citigroup. "If what the Fed does is interpreted as precluding further action, its going to hinder recovery of the markets and indicate a more downside risk for the economy."[7]

"The Fed has had broad authority that it has failed to use for many years to adequately protect consumers. … I hope the proposal will be worth the paper it's printed on." Though banking groups were preparing to object to the changes and consumer groups were expecting the Fed plan to fall short of their goals, it was unclear what impact the repricing change reform would have once implemented. Within the last year at least two big issuers, Citigroup Inc. and JPMorgan Chase & Co., announced they would stop repricing based on external risk factors during the term of the card contract. Bank of America still uses risk-based repricing, and Capital One reprices its customers when their cost of funds rate increases. "Most of the big players have already stopped doing this," said Jaret Seiberg, an analyst with Stanford Group Co.[46] If paying interest on reserves is used primarily as a tool to blow up the demand for bank excess reserve balances, so that an offsetting volume of Treasury securities can be added to the asset side of the Fed's balance sheet, there may be issues that could make daily Fed OMO more difficult, rendering greater variability in the funds rate.[38] I worry that paying near market rates of interest on reserve balances at the Fed may increase frictions in the interbank funding market. If banks can lend excess reserves to the Fed at an attractive rate, they may elect to do so instead of lending in the interbank market.[38]

The Fed has also announced it intends to handle payment allocation rules in which banks usually apply payments to the lowest interest rates first. That practice, too, has come under fire from lawmakers, particularly Sen. Carl Levin, D-Mich., and Rep. Maloney.[46] Mr MacIntosh has a similar view of the Fed's cuts to interest rates. He believes they've done more damage than good. Body: "I think there is a very high inverse correlation between the dollar and commodities prices," he said.[13] In the meantime, as the Fed's low interest rates keep the dollar low, the threat of stagflation grows. "I think it's a worry, but I don't think it's a huge one at this point," Mr MacIntosh said.[13] The Fed may slash interest rates by 25 basis points in June and another quarter point in August, Fujii said.[3]

Since September, Mr Bernanke has cut U.S. interest rates by 2.25 per cent, including a single 75 basis points cut to soothe investors' worries after global stock markets went into meltdown in late January.[6] Just ask the airlines. Higher inflation also leads to higher interest rates, making it tougher for companies that rely on borrowing to finance their operations. Not every company is at the mercy of the economic environment or its competitors. Companies with economic moats--those with strong competitive advantages and market powerare better able to raise prices. Most of these outfits are large, blue-chip firms, which also represent some of the best values in the stock market today after being ignored in favor of smaller or more-speculative names in recent years.[43] We need a catalyst," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon. "It could come from the FOMC just simply saying we are done cutting interest rates or highlighting the continuing upside surprises to inflation. This would go a long way towards putting in a bottom for the dollar. It's a necessary, but not sufficient, condition for dollar bottom."[4] The Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday to decide whether to lower interest rates again. It will also issue an updated assessment of the U.S. economy and financial system.[15] The weakening New Zealand economy has failed to sway the Reserve Bank, which opted to leave interest rates exactly where they were on Thursday. Governor Alan Bollard surprised no one when he announced that the official cash rate (OCR) would remain at 8.25 per cent, where it has been sitting since July. His comments did give a glimmer of hope to struggling homeowners.[36] The multitrillion-dollar capital market that supplies the essential raw material for the world's economy remains badly damaged. It may be that further cuts in interest rates won'''t help much.[26] By several measures, including negative real interest rates, current policy is decidedly stimulative or 'accommodative' in Fed-speak. 'This accommodative stance, along with the upcoming fiscal stimulus, may be sufficient to put the economy back on a growth track,' said Moran.[22]

Ken Clayton, the director of the American Bankers Association's Card Policy Council, agreed the changes could bring back wider use of annual fees and increase interest rates across the board. "If you can't price for risk on interest rates, you'll have to deal with it in other ways," he said. "If you take away our ability to price for risk, to charge interest on a loan, and to price our product, it's going to result in higher prices for consumers, less access to credit, and less choice[46] The other channels of policy -- market interest rates, asset prices, and bank lending -- are either clogged or are working in reverse."[14]

A bill introduced by Sen. Levin last year would stipulate that banks apply payments to the lowest interest rate first, while Rep. Maloney's would require banks to apply payments proportionally to different interest rates.[46]

NAB Capital Markets currency strategists said traders have squared positions ahead of the Fed's interest rate decision and key economic data.[19] If the data falls well below forecast, investors may begin to bet the Fed may have to resume rate cuts to assure adequate economic growth.[27] The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates would be the lowest since late 2004. Economists think the Fed may be inclined to leave rates at such low levels possibly through the rest of this year and maybe into next year — as long as the country is not hit with another blow to economic growth.[21] Westpac economist Brendan O'Donovan said the Reserve Bank was worried by an increasingly ugly near-term growth slowdown on one side, and a still-alarming inflation picture on the other. "When stuck between a rock and a hard place, not moving is a fair response," he said. In his statement on Thursday, Bollard said economic activity had weakened faster than the bank expected. He said the drought, negative business sentiment, tighter credit controls, a weak housing market and weaker world growth were contributing to a grim outlook for growth this year. He added there was still a risk of rising wage pressure keeping inflation high.[36]

The problem, according to economists surveyed by Business Daily, is that the core inflation rate - the measure typically used by government and central bankers when setting economic policy - doesn't take into account the cost of fuel and food. While core inflation rose only an average 4 per cent in the first quarter of this year - up from 2 per cent last year - the real cost of living has rocketed for Americans coming to grips with the worldwide commodities boom.[13]

ANZ National bank economists forecasted a drop this September, while Westpac economists remained cautious, saying that the market was getting ahead of itself by predicting a rate cut this year.[36]

The commercial banks delayed passing on last week's rate cut for about eight hours rather than the usual few minutes. Bank of Canada governor Mark Carney later noted the commercial banks were facing higher funding costs, suggesting that as a result they may not pass on all of any further cuts by the central bank, which would lessen the economic stimulus coming from the central bank rate reductions.[34] In addition to cuts in benchmark rates, the U.S. central bank has unleashed a series of emergency measures, sometimes in coordination with other central banks around the world, to keep banks and major financial firms lending and borrowing.[24]

Already, the central bank has incrementally reduced the key federal funds rate by 3 percentage points since last August to 2.25 percent from 5.25 percent.[15] Since mid-September, the central bank has reduced overnight lending rates by 3 percentage points to 2.25 percent, and it is seen trimming another quarter point on Wednesday.[27]

Most investors believe the Fed will lower rates by another quarter percentage point but will also suggest it is gearing up for a pause.[15] Harvard University professor Jeffrey Frankel says the Fed's easing of monetary policy may be contributing to the run-up in commodity prices. The low rates make it cheaper for companies to finance and build inventories; they also encourage investors to shift money from low-yielding bonds into commodities.[16]

On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to send out tax rebates.[18] Late on Friday, rate futures showed a 76 percent chance of a cut, but an almost one-in-four chance the Fed would hold steady. They also suggest rates will end the year back at 2.25 percent.[35] The Fed's rate cuts in January and March alone marked the most aggressive Fed intervention in a quarter-century. This time around, though, the Fed is likely to go with a smaller rate cut at the end of its two-day meeting on Wednesday.[21] We still doubt that the Fed will go cold turkey on rate cuts, given the continuing financial market stress.[8] Two members of the committee dissented, however, saying that a smaller rate cut would have been preferable in light of the dangers of inflation. The discord opened an unusual window into the internal debates of the Fed in the era of Bernanke, who has called for more transparency at an institution renowned for its secrecy.[7] Fears of inflation are likely to limit the Fed's generosity on the rate front and we only expect a quarter-point cut on April 30."[12]

There are the Fed officials who argue that lowering the target for overnight rates is not effectively reaching the consumer as other borrowing costs remain high, and who worry further reductions risk stoking already hot inflation.[1] There is always a chance for a surprise, Fed watchers say. Lowering the rate for a seventh time since August would be consistent with comments by Ben Bernanke, the Fed chairman, that a recession was still possible this year and that - as Treasury Secretary Henry Paulson Jr. put it - the risks were to the downside.[7] Food, fuel and raw material prices are rising, boosting inflationary pressures, a Fed report said recently. "This meeting's accompanying statement poses a special challenge for the committee -- justify easing another quarter point to avoid a deeper recession, and simultaneously acknowledging the risk of commodity inflationary pressures," RBS Greenwich Capital analysts David Ader and Ian Lyngen said in a research note.[24] Ian Copsey, a senior financial analyst at Global Forex Trading, said the Fed meeting and the release of first-quarter U.S. GDP data on Wednesday would continue to provide an overhang 'on the market's desire to open risk'.[19]

The overnight lending rate, which currently stands at 2.25%, has been brought down by 300 basis points since September. Preliminary GDP numbers are due out tomorrow, as well, and the Labor Department should report its monthly employment data on Friday. "It's all about the Fed statement tomorrow," said Chip Hanlon, president of Delta Global Advisors and contributor to RealMoney.com, a sister site to TheStreet.com. "If the Fed comes out of it and says it thinks it's done enough, and at least indicates it's going to pause its easing campaign, that continues to help the dollar and take the edge off these commodities in the short term."[48] The Fed, which isn't due to render any decisions until Wednesday, is widely expected to shave 25 basis points off the fed funds target rate.[48]

Under the proposal, card issuers would be allowed to consider outside factors to increase rates for new transactions, sources said, but not on existing balances. Banks would still be able to raise rates when a customer defaults on that account, but the Fed is expected to define such a circumstance.[46] The Reg Z proposal is expected to be amended when the Fed meets on Friday in order to better coordinate it with the central bank's new proposal governing unfair and deceptive card practices.[46] Congress in 2006 granted the Fed authority beginning in 2011 to pay interest on bank reserves. At the time, the central bank assigned staff to study the implications such a move could have on its operations. The staff report is now ready and will be presented to the Fed during the regularly scheduled meeting of its interest-rate setting panel, a Fed official added, declining to comment further on whether the presentation is pegged to any imminent steps to boost liquidity.[45] Fed officials have identified that measure as among a menu of options the central bank is considering as it copes with persistent problems in credit markets that are weighing on U.S. economic growth.[45] The bias should remain toward weaker growth, but with a downgrade in rhetoric that opens the door for a policy pause. In its press release after the two-day April meeting, the Fed can reiterate much of the Mar. 18 policy statement, but with perhaps a few tweaks to its key phrases: "Inflation has been elevated, and some indicators of inflation expectations have risen," "financial markets remain under considerable stress," and "the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters." As always, the market will be weighing those words carefully.[8] By discarding the Phillips Curve blinders, the Fed would happily learn that economic growth and low inflation are not a mutually exclusive trade-off.[33]

Partly because until recently the Fed has held that inflation is not a threat, and that the economy now demands low short-term rates and unlimited liquidity.[33] The Fed's attempts to prop up asset prices by flooding the economy with cash could result in too much money chasing too few goods--the classic recipe for inflation.[43] Worries, however, have grown that galloping food and energy prices could spread inflation throughout the economy. That's complicating the Fed's job.[10]

"However, the inflation story continues to deteriorate and, with oil almost at 120 dollars per barrel, the Fed's hope that falling oil prices will ease inflation pressures looks something of a remote one at the present time.[12] For the past eight months, as the mortgage crisis broadened into a full-scale credit crunch, the Fed has walked the tightrope between fighting a recession and fighting inflation. It chose to battle the more immediate threat, recession, which probably was the right call. That battle, though, comes at a price.[25]

The Fed, which has been cutting rates since last September, turned more forceful in January and March, when housing, credit and financial problems took a turn for the worse, threatening to plunge the country into a deep recession.[21] Under a proposal already put forward by the Fed last year that implements Regulation Z, which governs credit card disclosures, card companies would also have to give consumers advance notice of any rate change and the ability to opt out.[46] Factor in a credit card debt of $31 billion with inflation and rate rises, and the slump in business and consumer confidence, as reported recently, can be easily understood. According to a survey by the National Australia Bank, business confidence is at its lowest level for seven years. Consumer confidence, according to the latest Westpac-Melbourne Institute index, is at its lowest for 15 years.[49] If the Federal Reserve is able to get inflation under control it is a strong possibility that we may see a rate increase before the end of the year.[37] 'The best scenario would be if the Federal Reserve signals that there will be no more rate reductions, that will strengthen the dollar and will push down prices of raw materials including oil,' said Won.[30] When Federal Reserve governors meet today, they should consider that solutions to their twin challenges - a flagging economy and systemic moral hazard in financial markets - have common roots in a stable dollar.[33] In the United States, the Federal Reserve has had to pump billions of dollars into the economy to stave off recession, even though many analysts and commentators already say a recession has arrived.[49]

Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics.[38]

If that's what the Federal Open Market Committee (FOMC) does, it'll be a form of standard operating procedure. 'In every cycle there comes a time when they have addressed current conditions enough with rate cuts for the moment, and they stand aside and watch how things develop,' said Christopher Rupkey at Bank of Tokyo- Mitsubishi (other-otc: MSBHY.PK - news - people ).[22] RBS Greenwich Capital's Stephen Stanley (nyse: SXE - news - people ) doubts the FOMC members will want to risk a symmetrical risk statement again. 'A small rate cut accompanied by a statement that at least hints at the possibility that the easing campaign is near -- or even at -- an end would likely be sufficient to pacify most of the hawks,' he believes.[22]

I like cross-border activity, but I don't like paying almost $10 for a box of cheerios. The Federal Open Market Committee meets this week and most anticipate rates will be cut by 25 basis points or a quarter of a point down to 2%. [39] "I dont think theres any question that theyll cut 25 basis points off the rate," said David Rosenberg, chief North American economist at Merrill Lynch.[7]

If interest rates do stop falling, it could give some support to the battered U.S. dollar, economists say.[42] ANZ National Bank chief executive Graham Hodges said the effect of credit market turmoil on the profitability of the local banking sector might push interest rates for home buyers and other borrowers higher still.[36] Check the effect that the meeting has over the pairs in our Rates and Charts Section or compare the movements of the different banks in our World Interest Rates Table.[40] The reason we may start to see a hold in interest rates is because the financial forecast has not gotten worse since the last meeting.[37]

Let's not get ahead of ourselves. Let's see what the monetary czars will do (and say) this week. While we're waiting, let's observe once more that cutting interest rates at this juncture may be politically intelligent; it may even look shrewd as the ongoing economic slowdown/recession gathers momentum. It's also risky with inflationary winds blowing.[23] Against a background of interest rate pressure and the credit crunch, two new treasurers prepare to hand down their budgets.[49] The quickest known antidote to higher inflation is to move interest rates back up again.[26]

The European Central Bank last week raised rates amid concern of accelerating inflation.[12] The euro edged up 0.1 percent against the dollar at $1.5644, snapping a three-day decline. Comments from European Central Bank officials repeating their warnings about persistent inflation have lent mild euro support for most of the session.[28] The EUR/USD edged up 0,1 % at 1,5644, snapping a three-day decline, but it was still more than 3 cents below last week'''s record high. Comments from European Central Bank officials repeating their warnings about constant inflation have lent mild EUR support.[5] With that in mind, let's take a dip and consider one blogger's view of the universe. As we've written many times in the recent past (such as this post from 2005 ), the warning signs on inflation have been lively for some time. Yet those signs have gone largely unheeded by the central bank.[23]

After a potential cut Wednesday, the central bank may pause to assess the economy.[42] The considerable fiscal challenges facing the U.S. economy are not the responsibility of the central bank.[33] The meeting does not necessarily mean the U.S. central bank is poised to take that step, which would require congressional action.[45] The plan, which is expected to be released Friday at a meeting of the central bank's board, is tougher than expected.[46]

Sources said the central bank may require banks to give customers advance notice and the ability to opt out of overdraft programs as well, sources said. It is unclear if the Fed's plan will be aggressive enough to ward off congressional intervention.[46]

Chief economist John Ryding at Bear Stearns said the Fed has widely opened up credit to the brokerage sector and banks and in doing so "massively reduced the systemic risk of a financial meltdown." He sees "a significant downshifting in the pace of interest-rate reduction."[14] "A pause by the Fed is a reflection of the fact the Fed thinks the worst is over or at least the bottom is in sight for the economy," says David Wyss, chief economist for Standard & Poor's in New York. Just before making its decision Wednesday, the Fed will get a chance to view the Commerce Department's initial report on gross domestic product (GDP) for the first quarter.[42] "What we're seeing now is a big shift in market sentiment regarding the Fed," said Gary Pollack, who helped oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "The feeling is the Fed may pause after it meets next week." he was quoted as saying by Bloomberg.[12] His stand: A protester outside Bear Stearns's headquarters in New York last Friday criticized Fed Chairman Bernanke's economic policies. The Fed will review interest-rate levels this week.[42] Now, investors are betting the credit markets are on the mend and Wall Street is looking forward to an economic recovery. The market wants to hear this week that the Fed is confident, too.[18]

I don't see the effects just yet, and it has been over six months since the Fed started cutting rates. This week, stimulus checks will go out and, for a moment, we will all breath a sigh of relief.[39]

Hours before the announcement of the Fed's rate decision Wednesday, the U.S. government will release first-quarter economic data.[19] In response to the Fed's expected action, the prime lending rate for millions of consumers and businesses would fall by a corresponding amount, to 5 percent.[10] Then-chairman Alan Greenspan held the rate at that super-low level for a year, before the Fed began to bump it up. That action has since fueled criticism that Greenspan helped to create the very housing boom that has now gone bust, wreaking havoc on the economy.[21] Rate cuts have been the Fed'''s main weapon against a slowdown, but each move usually takes at least six months to begin having the desired effect.[26] The Fed, trying to still the chaos in the markets, also left the door open to more rate cuts.[7]

At the Fed's last meeting in March, two of the 10 voting members on the rate-setting committee opposed the three-quarter percentage point cut, preferring less aggressive action.[1]

Interest-rate futures prices imply about an 80 percent probability of a further quarter-point reduction and about a one-in-five chance of no move at all when the Fed wraps up a two-day meeting on Wednesday.[24] There are any number of explanations, ranging from the view that inflation doesn't threaten all the way to charges of conspiracy and/or incompetence at the Fed. For strategic-minded investors, the true answer matters a whole lot less than whether inflationary momentum has been let out of the monetary bag, and on that score only time will tell. That leaves us with the distasteful task of forecasting, which invariably is subject to error. For those of us without supreme confidence in predicting the future, hedging one's bets in degrees looks prudent.[23] Beyond worries about the U.S. economy, investors are also concerned about rising inflation, especially with crude oil prices still trading close to record levels.[30] The dollar's decline has pushed oil and gold prices to record highs as investors scramble to hedge against a weakened greenback and the resulting inflation. It has, however, boosted U.S. exports, helping reduce the country's huge current account gap.[27]

Home prices in London are off the charts. I was shocked! I asked Ashley exactly who was buying these $25 million dollar brownstones; he said it is the Russians. They've made a lot of money on oil and many bought companies for pennies on the dollar during the fall of communism. Here in the U.S., sovereign wealth funds, many of which are domiciled in the Middle East, are investing in American companies and real estate at breakneck paces, taking advantage of their riches in oil and the weak U.S. dollar. All of which could be viewed as a great development for both the U.S. and UK. After all, just this week Steve Schwarzman of Blackstone, a global private equity behemoth, announced that the company was raising a European property fund to begin nibbling on attractive real estate plays as property values were declining in the UK and Europe.[39] While I was in London, toward the latter half of this week I did hear and read that crude oil hit $120 dollars a barrel. (Ok, you caught me, I am catching up on what I missed.) The shame is, much to my great dismay, this commodity rise isn't letting up. I was one of those overly optimistic prognosticators who predicted that oil at year's end would be lower then where we started on the year and that the U.S. dollar would be higher. What concerns me is not the one-off situations in Nigeria or the UK, but the flight to commodities (like oil as an investment vehicle), a U.S. dollar hedge and good old fundamentals! What are those good old fundamentals? Demand, population growth, China and India.[39]

Due to the forward looking nature of the market it often trades more on expectations over actual reality and with the bad news largely priced in, the U.S. dollar is strengthening even as the economy looks to be in recession. This morning the dollar has gained.9% vs the AUD and GBP, 1.5% vs NZD, and the EUR has fallen another.50% today. Not surprisingly, the CAD has held its position as it has been well insulated against upside and downside moves in the USD. High oil prices are balancing growth concerns causing USDCAD to trade in a narrow range.[32]

"The U.S. appears to have slipped into recession, which is likely to keep the Fed wanting to lean further against growth headwinds with monetary ease," Chief economist John Ryding at Bear Stearns quoted as saying by The Economist Times.[12] "We may not turn out to have a serious recession," says Lyle Gramley, a consulting economist with the Stanford Group in Washington and a former Fed governor. "It may turn out to be an extended period of modest growth."[42]

"The U.S. appears to have slipped into recession, which is likely to keep the Fed wanting to lean further against growth headwinds with monetary ease," Ryding said.[14]

The U.S. suffered a 16- month recession that started in November 1973 and almost doubled unemployment to 9 percent. Relief on the inflation front proved to be only temporary as Burns quickly backed off those rates. [16] The world's biggest economy expanded 2.2 percent in 2007. Lower rates in the United States weaken the greenback because it reduces the appeal of dollar-denominated assets such as Treasuries. The U.S. will also announce this month's unemployment rate on Friday.[3] While U.S. data still points to an economic slowdown, financial markets have been performing relatively well, with the S&P; 500 rallying by 11 percent since mid-March. The wider question now is whether this recovery can be sustained and in turn help the real economy to turn the corner. "The issue will be whether the market, which appears increasingly confident that financial catastrophe will be averted, can retain its optimism in the face of continued weakness in the data," said Daragh Maher at Calyon.[31]

The first batch of rebates started flowing to bank accounts on Monday, earlier than originally scheduled. It's the first half of this year where damage from the housing, credit and financial debacles could be the worst. The economy may grow little, if at all, during this period and could actually shrink, Bernanke told Congress earlier this month. A recession, he said, was possible. It was Bernanke's first public acknowledgment of such a scenario.[21] The subprime loan crisis has had a domino effect, feeding into a credit crunch that is affecting business worldwide. Although Australia's exposure to the subprime crisis has been minimal, it has led to banks for the first time raising their rates marginally and independently of rises by the Reserve Bank.[49] Capital appears to be flowing into the banks and the systemic risks to the banking sector have moderated significantly," rates strategists at Calyon wrote in a note on Tuesday. "Banks have realised that it is no longer taboo to ask existing shareholders for cash by doing rights issues," they said, noting that banks have attracted over $200 billion in capital injections in one form or another since the credit crunch erupted, helping to plug the gaps left by more than $300 billion of writedowns and related losses.[9] The euro was quoted at $1.5650, up from $1.5633. 'All this talk about U.S. rates bottoming out are premature,' said Bank of America's Fujii.[3] What's my point? What do oil at $120 dollars a barrel and overseas investment in dilapidated U.S. and UK real estate and corporations have to do with one another? A lot! With the U.S. dollar at historically low levels, the sterling is touching another record low against the euro, now at nearly 79p. Even T he Sunday Telegraph is recommending to the Brits where to go on holiday (as they call it) for the best exchange rates.[39] "The big question everyone is talking about is whether the Fed has enough backbone to recognize that the bond market is right and the Fed should not ease tomorrow," said Andrew Busch at BMO Capital Markets. "This would have the dual felicitous effect of rallying the U.S. dollar and putting downward pressure on oil."[29]

Mr MacIntosh says the unwillingness of banks to lend has little to do with rates. He argues the Fed has had more success with increasing liquidity using other monetary instruments.[13] 'There is genuine uncertainty over the Fed's rate decision and statement for the first time in a while,' NAB said in a note.[19] During times of credit strains (now)this option of lending to the Fed, might actually reduced the liquidity of the interbank market causing Libor and other interbank spreads to become even wider. Presumably if this were to occur, banks would pass the higher costs, or reduced availability of credit to potential borrowers. This may serve to heighten the "Adverse Feedback Loop" problem, rather than aid in the healing of credit markets.[38] The information is timely because it comes as Fed officials seek to thaw frozen credit markets with a series of liquidity offerings to banks and financial institutions.[45] The bill has stalled in the committee and is unlikely to move forward without changes that allow it more bipartisan support. Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, who has expressed frustration with many credit card practices, has invited the top six issuers to meet May 5 to discuss their reactions to the Fed's proposal.[46] At an April 17 hearing House Democrats vowed to press onward with a bill from Financial Services Committee Chairman Barney Frank, D-Mass., and Rep. Carolyn Maloney, D-N.Y., that would rein in credit card practices regardless of the Fed's proposal.[46]

"If the news is unremittingly bad, it will go down again. The Fed has got plenty of ammunition if its needs it. My guess is this will be about it," said Bill Cheney, chief economist at John Hancock Financial Services.[21] Then there are the economists who see a direct link between the Fed's sharp moves and the explosive commodity price gains since January.[1] Here's what has happened to dampen Fed-easing expectations: Commodity prices have failed to moderate, as per the Fed's forecast, and have instead surged. This has prompted a meteoric 40-basis-point rise in the yield on the 10-year note over the past two weeks, to 3.85%.[8]

Though it was still unclear how the Fed would treat payment allocation, some sources said a proportional application of payments was more likely than the upending of the practice altogether. Senate Banking Committee Chairman Chris Dodd, D-Conn., is also expected to introduce sweeping credit card legislation this week.[46]

Tomorrow we expect that the Fed will still highlight the continued problems with the economy in terms of consumer spending and labour markets, and also note that inflation has to be monitored carefully. The overall tone of the statement could signal that they are close to done.[32] The Fed is facing a difficult juggling act of trying to shore up the faltering economy while also trying to keep inflation from taking off.[10]

Stagflation, the dreaded combination of a stagnant economy and high inflation which devastated the U.S. economy in the 1970s, is now the talk of Wall Street as analysts and policymakers try to determine how much rising costs might be affecting consumers and businesses already suffering from a contracting economy.[13] Of course, if you've filled your gas tank or bought a carton of eggs lately, you probably don't need me to tell you that rising prices are already a problem. You're paying more for both food and energy thanks to surging commodity prices. There are signs those higher prices are working their way through the broader economy: In February, the U.S. government announced that wholesale prices were 7% higher in January 2008 versus the year before. Consumer prices didn't rise quite as quickly, but its 4.3% annual pace was higher than recent historical norms.[43] The 10 high inflation years (between 1973-81, 1969, and 1990) averaged 9.1% in consumer price increases, along with 6.2% unemployment and 2.6% in growth.[33] More strikingly, the years following the 10 lowest inflation years were even better in terms of performance (averaging 5.1% unemployment and 4.4% growth), and the years following the high inflation years were even worse (7% unemployment and 1.4% GDP growth). This record shows the importance of sound money, fostering an environment allowing the key growth drivers of entrepreneurship and capital investment to flourish under stable long-run expectations.[33] Since 1948, according to Bureau of Labor Statistics figures, inflation has averaged 3.7% per year, unemployment 5.6%, and real GDP growth 3.4%.[33] Low inflation was often associated with lower unemployment and stronger GDP growth than high-inflation years.[33] The 10 lowest inflation years (between 1949-62, and 1986) averaged 0.5% inflation and 5.2% unemployment, along with 3.5% GDP growth.[33]

Despite expectations that the FOMC will then be finished with rate-cutting, Henderson said the market will first have to contend with more bad news on the data front. He said advanced first quarter gross domestic product (GDP) data due out on Wednesday is forecast to show growth of just 0.3 percent annualised growth though the result could be negative. [15] The currency market is bracing for the release of the January to March gross domestic product data in the United States on April 30 which could influence the outcome of the FOMC meeting, said Tomoko Fujii, head of economic strategy at Bank of America (nyse: BAC - news - people ) in Tokyo. The GDP figures will be released ahead of the FOMC's statement on the result of its policy discussions. At 1:00 p.m. (0500 GMT), the dollar was trading at 104.52 yen, down from 104.72 yen in Sydney this morning.[3]

I called Bob McTeer, the former president of the Federal Reserve Bank of Dallas and a man who's attended quite a few FOMC meetings. When I reached him, he'd just started on a slice of coconut cream pie. No doubt he paid more for it than he would have a few months ago, but I didn't ask about his dessert.[25] Updated from 9:54 a.m. EDT Wall Street was giving back ground Tuesday in the face of more uneven earnings reports and dour economic data, as well as an ongoing Federal Reserve meeting.[48] In addition to the Fed's meeting, Wall Street will continue to examine earnings from consumer-focused brands like Kellogg Co., Procter & Gamble Co., and Colgate-Palmolive Co., as well as economic data.[18]

While the Fed bases monetary policy on the economic outlook rather than past performance, it does matter that 'the economy is not cascading lower' in the words of Michael Moran of Daiwa Securities.[22] Evidence of how Canada is faring is expected Wednesday in Statistics Canada's economic report card for February, which analysts expect will show growth slowed to 0.2 per cent in February following a 0.6 rebound the month before. "Overall, this will pull down annualized GDP growth in the past three months to zero," said BMO Capital Markets economist Sal Guatieri. "So much for decoupling," he added in reference to what are now nearly dashed hopes that Canada's resource-rich economy might be able to power ahead despite the slump in its largest export market.[34] Economists polled by Reuters expect the economy expanded at a sickly 0.2 percent annual rate, which would be the weakest since the closing months of 2002.[24]

Rate cuts at the federal level typically take at least six months to start affecting the broader economy.[18] The rate cuts seem to have had only mixed success with a more immediate goal ''' calming financial markets.[26] The rate verdict on Wednesday will likely bring another quarter point reduction but also a warning that more cuts may not be forthcoming.[31] An OCR cut would lower the starting point for the cost of borrowing, but ASB's Tennent-Brown said overseas factors were the main reasons mortgage rates were so high. "The issue for retail rates is not the OCR right now," he said.[36]

While Wall Street finally appeared ready to hear that rates might stay put, a halt to rate cuts would not be a completely positive sign.[12] I realize that jobs will be lost and hear from many of my closest and most powerful friends in the financial community that as many as 30% of Wall Street jobs will be cut a year from now.[39]

Think about it: oil prices are up almost 90% in one year. Who can afford this? One of the things that I said to Ashley Webster, our London correspondent, this past weekend while visiting London was how booming and busy the city was despite all the talk of inflation, declining home values and increased job losses.[39] With oil and food prices surging, Volcker told the Economic Club of New York on April 9 that "there are some resemblances between the present situation and the period in the early 1970s,'' when then-Fed Chairman Burns let an inflation psychology take hold.[16] Expecting Treasuries to post another big rally over the next 12 months if CPI keeps rising from current levels may be asking for too much, even in a world of absurd financial news. Accordingly, those who think inflation will still be a problem through 2009 may be inclined to hold a bit more cash than usual with an eye on buying Treasuries at materially lower prices (and therefore higher yields) somewhere in the spring of 2009.[23]

The ECB, though, is charged only with keeping inflation in check, while the Fed is supposed to ensure the stability of our financial system.[25] To understand why it may not, and why a different path should be taken, it must be recognized that Fed policy has long been guided by - or perhaps more accurately, yoked to - the alleged trade-off between unemployment and inflation: the so-called Phillips Curve.[33]

A risk for the Fed is that if Congress agreed to give it the authority to pay interest on reserves immediately, it might ask the Fed to so something in return say, help out the student loan or auction-rate securities market.[38] The reason for the late implementation was budgetary. Paying interest on reserves will reduce the amount of income the Fed earns on its securities portfolio and remits to Treasury each year.[38]

The Fed could also further reduce the cost by arranging to pay interest only on excess reserves the amount that exceeds the required minimum.[38]

Banks would still have to maintain some reserves at the Fed to clear payments with each other. CBO assumed the Fed would not phase out those requirements.[38]

IN THE next two weeks the financial course for Victoria and Australia will be set. Victorian Treasurer John Lenders will deliver his first state budget. The following Tuesday, federal Treasurer Wayne Swan will make his budget debut. The Reserve Bank board meets on the day of the state budget, and its decision may cast a shadow over both performances.[49] Reporter Ron Scherer discusses possible action by the Federal Reserve this week.[42] Right before the last Federal Reserve meeting, investors were worried about the global banking system imploding.[18] The Federal Reserve had been forced to underwrite JP Morgan's rescue of Bear Stearns, and Wall Street was waiting for news of the next big casualty.[20]

"No, the credit crisis isn't over," says Ben Steverman in BusinessWeek.com, but Wall Street seems like a much calmer place these days. Ever since the "dirt-cheap buyout" of Bear Stearns on March 17, investors have slowly been selling their "safe, low-yield assets" to reinvest the money in more lucrative--and risky--ventures. It's not exactly "euphoria," but it seems like a return to the "normal" risk investors are used to, instead of "systemic" risk like the "domino-like" collapse of the entire banking system.[11] 'The market is fairly flat today as there was not really much of a lead from Wall Street with investors a little bit wary ahead of the FOMC's two-day meeting starting tonight,' said Juliette Saly, an equities analyst with CommSec in Sydney.[30]

'Investors appear fatigued following the market's recent run-up and many are taking a wait-and-see position until the U.S. rate decision is out,' said Won Jong-hyuck, an analyst at SK Securities in Seoul.[30] Investors are waiting for the release tomorrow of advance U.S. GDP data for the first quarter, which would show whether the world's biggest economy has indeed entered a recession.[30] Investors are betting that while the economy likely is in a recession it will begin expanding again by the end of the year. Many of the companies recently reporting strong quarterly results, especially those with overseas operations that have benefited from a weaker dollar, seem to share that view.[26]

"When policies work, people totally forget about them," McTeer said. "Two years from now, people will forget they averted a crisis and blame them for not fighting inflation." The question for Wednesday's meeting is whether the economy needs stimulus, or whether inflation ' remember those Doritos ' is now a bigger concern.[25] "The economy in the '70s had a tremendous inflationary bias; the recession slowed inflation but didn't stop it,'' says Wyatt Wells, a professor at Auburn University and author of a biography of Burns.[16]

"If you base everything off the core inflation rate, everything looks hunky-dory," said Robert Macintosh, chief economist at Eaton Vance. [13] After falling from a 12.3 percent rate in December 1974 to 4.9 percent in 1976, inflation shot back up, reaching 13.3 percent by December 1979, Volcker's fifth month in office.[16]

On Thursday the April ISM Manufacturing index is expected to fall a touch further to 48.3 while on Friday April non-farm payrolls data is likely to show another up-tick in the unemployment rate to 5.2 percent from 5.1 percent in March and a fall in jobs of 75,000, a slight improvement on the 80,000 jobs lost in March.[15] Economists surveyed by Thomson Financial/IFR expect the government to say personal spending rose by 0.3 percent in March, but that payrolls dropped by 75,000 in April and unemployment rose to 5.2 percent. Last week, several companies released results and forecasts that disappointed investors — including Microsoft Corp., 3M Co., Motorola Inc. and Bank of America Corp. — but there were upbeat surprises, such as Boeing Co.' s earnings., that provided some relief.[18] Even the gold price, whose rise to more than $1,030 (£519.50) an ounce last month was greeted as a harbinger of doom, and a sign that investors were desperate for any safe haven in the financial storm, has dropped back, falling below $900 last week.[20] The Fed's aggressive stance, aimed largely at stabilizing financial markets in the wake of the subprime mortgage crisis, has undermined the appeal of dollar-denominated assets to foreign investors who could find higher yields elsewhere.[27] The Fed got the authority to start paying interest in October 2011 under the Financial Services Regulatory Relief Act of 2006, signed into law on Oct. 13, 2006.[38] "We are entering the stage where it is time for the Fed to wind down and move to the sidelines," said Greg McBride, senior financial analyst at Bankrate.com.[6] We can't wait to see if the Fed's recession-fighting policy has worked. It's time to throw the lever the other way.[25]

As for the risk of further credit-market blow-ups, the Fed's new lending facilities and the discount window are more appropriate tools for case-by-case illiquidity issues than blunt interest-rate mechanisms.[33] The Fed has already raised the issue with Congress, although it hasn't made a formal push. Getting Congress to agree to swallow the cost a few years early in principle shouldn't be hard since Congress has already set aside its adherence to the principal of 'Paygo' that all revenue reductions and cost increases need to be offset elsewhere.[38] Rocky earnings reports and the impending Fed meeting were weighing on all three major indices.[48]

Some said the Fed's harsher view of credit cards was driven in part by more political pressure. "It's going to be tougher than what some people first thought," said Oliver Ireland, a former Fed lawyer who is now a partner in the Washington office of Morrison & Foerster LLP. "They have been criticized for having not acted and they have taken those criticisms to heart and are trying to do a credible job in addressing them."[46] What has happened? Many argue, me included, that the reliquifying of the markets occurred because the Fed opened the discount window and pumped money into the credit markets by expanded Term Auction Facilities.[39]

Currently card companies are allowed to use outside factors to increase a customer's rate, including defaults elsewhere, decline in credit quality, or an increase in banks' costs of funds. [46] Even when the central bank lowers the OCR, there is no guarantee the rates banks charge to borrowers will come down.[36] Central bank officials already have hinted that if there's a cut, it may be the last one for a while.[25]

"The fact that the Reserve Bank may or may not cut the OCR isn't really going to make a big different to all the uncertainty we are seeing offshore. "The premiums all banks are having to pay are flowing into those higher mortgage rates."[36]

Finance Minister Jim Flaherty meets with the heads of the big banks today in Toronto. The meeting was scheduled to discuss proposed financial reforms, but Flaherty could use the opportunity to impress upon the bankers the importance of passing on as much rate relief as they can. [34] Without that demand, interest rates would rise and, with domestic savings diverted to service the debt, output would be lower and prices higher.[33] A.W. Phillips's original 1958 paper dealt with wage rate changes and unemployment. Eventually it would become conventional policy wisdom to apply his insight more broadly to price level movements against the unemployment rate.[33]

The jobless rate probably rose from 5.1 percent in March. 'This is a very eventful week.[3] The prime lending rate for millions of consumers and businesses would fall by a corresponding amount, to 5 percent.[21]

For more mortgage rate news visit Future Planning Financial at www.fpf-direct.com. [37] "And, contrary to popular opinion, the income data are, on net, getting worse, not better," writes David Rosenberg, chief economist at Merrill Lynch & Co. in New York, in an e-mail to clients. His bearish view of the economy is not shared by everyone, however.[42] "There's enough mixed signals out there that now's the time to put that forward," said Kurt Karl, chief U.S. economist at Swiss Re, referring to mediocre-but-not-horrific readings on the economy and corporate profits that have helped bring some stability to the stock market.[18]

You can find out how iShares Dow Jones U.S. Real Estate stacks up by clicking here under the Premium Features heading.) If commodities and real estate won't work, how about TIPS? TIPS, short for Treasury Inflation-Protected Securities, launched in the 1990s and are widely used as inflation hedges because their face values, and resulting coupon payments, are tied to the consumer price index. [43] During that time the annual pace of consumer prices has risen to 4.0% as of last month, up sharply from CPI's 2.6% annual pace in June 2007. It's no mean feat to see a bull market in 10-year Treasuries as inflation gains a robust head of steam.[23]

The time for overt inflation hedging is now past. That ship has sailed. We say that because as compelling as the inflation forecast may be, it's not preordained and so buying insurance at this point may entail more risk than is weathering the underlying hazard.[23] The good news is that a range of choices await, starting with inflation-indexed bonds and commodity funds. The bad news: hedging inflation's potential at this point isn't cheap. It's downright expensive.[23]

Ten-year note yields climbed a fifth straight week as crude oil set a record high, fanning concern that rising prices for food and energy would cause inflation to accelerate.[12] Frito-Lay, the maker of my favorite junk food, said last week it was raising prices, mostly on larger bags of snacks, because of higher prices for grain, cooking oil and energy. It admitted it already cut back on the number of chips per bag (I knew it!).[25] Commodity prices took off, led by a quadrupling of oil prices from 1973 to 1975 as the Organization of Petroleum Exporting Countries cut output.[16]

The Telegraph goes on to talk about the rise in oil prices from $10 dollars to $60 dollars from 1999 to 2006 and the doubling in the past year.[39]

On inflation, Bernanke said rising prices are a source of concern and must be monitored closely. He is hopeful inflation will moderate in coming quarters. Gasoline prices have shot up to record highs in recent days and could hit $4 a gallon this summer.[21] OPEC president Chakib Khelil warned yesterday that it may hit $US200 a barrel. As The Age reported last week, food, petrol, housing and finance are only about 50% of consumer spending, yet they make up 80% of the factors contributing to inflation.[49]

Globalization has expanded labor supply, introducing low-cost imports and restraining Organization for Economic Cooperation Development wage growth. This suggests that central-bank inflation targeting in advanced economies has been relatively unimportant. To read an extended version of this article, log on to Oxford Analytica's Web site.[44]

In late New York trade, the New York Board of Trade's dollar index was down 0.2 percent at 72.595.DXY. The index, which tracks the dollar's performance against a basket of six currencies, advanced for three days last week. [4] "We have got to get past the event risk of the FOMC meeting as well the U.S data before the dollar can make any significant gains.[4]

Broad measures of the money supply are expanding rapidly. One such measure, MZM ("Money of Zero Maturity"), has grown 16.3% in the last year, accelerating to a 30.3% annualized rate since the middle of January. [33] London interbank offered rates for sterling funds also fell and spreads tightened a little on Tuesday, suggesting broad money market strains might be slowly easing, although euro rates and spreads rose again.[9]

As the debt bombs created by lax mortgage lending standards began exploding last year ''''' blowing big holes in the value of hedge funds and the balance sheets of financial services companies ''' the credit markets all but shut down.[26]

SOURCES

1. RPT-GLOBAL ECONOMY WEEKAHEAD-The case against US rate cuts | Markets | Reuters
2. BBC NEWS | Business | US rates tipped for one more cut
3. Forex - Dollar weakens in Asian afternoon trade ahead of FOMC meeting, data - Forbes.com
4. FOREX-Dollar falls broadly as FOMC, data awaited | Currencies | Reuters
5. USD fell against a basket of currencies
6. Fed facing rate poser | Herald Sun
7. Fed expected to cut rates, but focus will be on its words - International Herald Tribune
8. Will the Fed Really Ease Rates Again?
9. UPDATE 1-Dollar Libor dips, spreads ease ahead of Fed | Markets | Bonds News | Reuters
10. The Associated Press: Fed poised to cut rates; may take a break after that
11. Best Columns: Financial Calm, Fed Pause - The Week
12. US Fed under huge pressure amid crisis and inflation
13. US braces for another interest rate rise | Herald Sun
14. AFP: Fed may be near end of rate-cut cycle: analysts
15. Forex - U.S. dollar mixed in Sydney morning trade ahead of FOMC meeting - Forbes.com
16. Bloomberg.com: Worldwide
17. Philippine shares outlook - Higher after mixed Wall Street session - Forbes.com
18. The Associated Press: Wall Street looks for cues from Federal Reserve meeting
19. Forex - Dollar steady in Asian afternoon trade ahead of Fed meeting, data - Forbes.com
20. Crisis fears recede on Wall Street - Times Online
21. The Associated Press: Fed poised to cut rates; may take a break after that
22. FOCUS 'One and done' from the Fed expected on Wednesday - Forbes.com
23. Will Inflation Keep Bubbling? - Seeking Alpha
24. What the Fed is considering at its meeting | Reuters
25. Inflation hits close to home | Chron.com - Houston Chronicle
26. Fed may be forced to take a breather - Eye on the Economy - MSNBC.com
27. Fed easing pause may lift dollar, payrolls key | Reuters
28. FOREX-Dollar rally pauses as Fed rate decision looms | Currencies | Reuters
29. AFP: US stocks steady ahead of GDP, Fed decision
30. Asian markets mixed on caution ahead of FOMC meeting - UPDATE - Forbes.com
31. AFP: Pound boosted against dollar, euro
32. Articles
33. The Fed Must Strengthen the Dollar - WSJ.com
34. Series of rate cuts running out of rope
35. Fed likely to cut U.S. rates, could signal pause | Reuters
36. Bollard throws ray of light to homeowners - 27 Apr 2008 - NZ Herald: New Zealand Business, Markets, Currency and Personal Finance News
37. Upcoming Fed Rate Cut
38. Economics Blog : Fed Paying Interest on Reserves: an Old Idea With a New Urgency
39. Leaking Economy in Need of Fix at Glick Report
40. Preview of Apr 30 Meeting
41. Free Preview - WSJ.com
42. Are Fed rate cuts nearly over? | csmonitor.com
43. As Prices Soar, How Can Investors Cope? - Morningstar The Short Answer
44. 'Great Reflation' On The Horizon? - Forbes.com
45. Fed board to discuss paying interest on reserves | Reuters
46. Fed Plans to Restrict Card-Rate Increases - Articles - On Wall Street
47. Free Preview - WSJ.com
48. Uneven Earnings Weigh on U.S. Stocks | The Market Story | BAC BP CFC DB MA MRK RDS.A V - TheStreet.com
49. Short-term pain versus long-term gain - Editorial - Opinion - theage.com.au

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