The U.S. Federal Reserve on Wednesday lowered its key interest rate
but also signaled the seven-month easing cycle may be coming to an end
by referring to "substantial" action to date and dropping a reference
to downside growth risks.
The cut, the seventh since September, was modest by recent standards,
reflecting upward pressure on inflation from higher food and energy
prices and the weak dollar. Those trends suggest further rate cuts
might do more harm than good in the months ahead.
The Federal Open Market Committee voted 8-2 to lower its target for
the fed funds rate at which banks lend money to each other by 0.25
percentage point to 2%, its lowest since November 2004.
It lowered the discount rate charged to banks and brokers that borrow
directly from the Fed by 0.25 percentage point to 2.25%, responding to
requests by Fed banks in New York, Cleveland, Atlanta and San
Francisco.
The moves were widely expected, according to a Dow Jones Newswires
survey.
Dallas Fed President Richard Fisher and Philadelphia Fed President
Charles Plosser dissented for a second-straight meeting, this time
favoring no change in rates. It is the sixth-straight dissent Fed
Chairman Ben Bernanke has faced on a fed-funds decision.
"Economic activity remains weak," the Fed said, citing "subdued"
consumer and business spending and a "further" softening in labor
markets. Markets "remain under considerable stress," the Fed said,
while housing should continue to weigh on the economy. Those
statements largely reiterated March's policy statement.
Barring an unforeseen collapse in the economy or financial markets,
rates will probably stay where they are for several months at least,
though the Fed left the door open to more cuts if needed.
"The substantial easing of monetary policy to date...should help to
promote moderate growth over time," the Fed said. Prior policy
statements hadn't described past cuts as "substantial."
Notably, officials dropped their previous reference to downside growth
risks. They said they would act as needed to promote growth, but
dropped the longstanding reference to "timely" action.
Fed watchers usually interpret reference to ***ulative actions as a
sign that officials are wary to lower rates further.
The Fed tried to send similar signals in the past and failed, most
notably in October when it said - prematurely - that growth and
inflation risks were roughly balanced.
The Fed in its statement Wednesday repeated past assertions that
inflation should moderate, and reiterated that it expects energy and
commodity prices to flatten out. However, officials warned that those
commodity prices have increased recently and that inflation
uncertainty "remains high."
Officials nodded for a second-straight time to rising inflation
expectations.
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