Fed likely to pause after expected 25bp rate cut
By Chris Flood
Published: April 27 2008 17:34 | Last updated: April 27 2008 17:34
The Federal Reserve is expected to cut US interest rates by a quarter point to 2 per cent on Wednesday but speculation is mounting that a pause will then be signalled so policymakers can assess the impact of the 300 basis points of monetary easing so far.
However, this week’s data releases will underline the difficulty of stopping monetary easing in the face of a continued deterioration in economic activity. Meanwhile, money markets continue to show signs of stress with the spread between three-month dollar Libor and Fed funds at an uncomfortably high 66 basis points, suggesting credit crisis tensions will persist.
But with oil prices at record levels, the Fed is concerned about inflationary pressures – so, instead of cutting interest rates further, it may consider expanding the size of its term auction facility or offering the swap for unwanted mortgage assets for longer periods.
US consumer confidence has nosedived over the past six months. With gasoline prices at record levels and unemployment rising, the consensus forecast for April, due on Tuesday, is for a fall from 64.5 in March to 62.
Further declines in US house prices are likely with the Case-Shiller composite of 20 metropolitan areas expected to show the year-on-year decline rising from 10.7 per cent in January to 11.7 per cent in February, also due on Tuesday.
The weakness in the housing market and slower consumer spending will weigh on US first quarter gross domestic product with the initial estimate, due on Wednesday, likely to show growth slowing to 0.5 per cent from 0.6 per cent in the fourth quarter of last year. The weaker dollar is boosting exports and trade should make a positive contribution to GDP growth.
The Fed’s preferred inflation measure – the core personal consumption expenditure deflator – is expected to remain unchanged at 2 per cent in March.
However, the Institute for Supply Management survey, due on Thursday, shows inflationary pressures facing manufacturers remain high. The headline ISM activity measure is expected to dip from 48.6 in March to 48, indicating a further contraction in manufacturing activity.
US employment data for April, due on Friday, are expected to show non-farm payrolls decline for a fourth month with a fall of 75,000 while the unemployment rate should rise from 5.1 per cent to 5.2 per cent.
In the UK, activity in the housing market looks set to weaken further with mortgage approvals, due on Tuesday, expected to drop from 73,000 in February to 70,000. However, HSBC warn mortgage approvals could have fallen to 60,000 – the lowest on record.
Copyright The Financial Times Limited 2008