Global Economy

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October 8, 2008, 2:49 pm<b>
Will Fed Cut Again in Three Weeks?</b>

The Federal Reserve cut interest rates today by a half percentage point in a coordinated effort with global central banks, and already some economists are wondering whether more cuts are imminent.

The Federal Open Market Committee convenes again in three weeks for its scheduled rate-setting meeting, and even though today’s move drops the federal funds rate to 1.5%, some economists see a further drop on Oct. 29.

In a research note, RBS Greenwich Capital said it expects the central bank to cut the fed funds rate to 1% at its next meeting. “In recent years, whenever rates have been cut between meetings in an emergency fashion, another easing has been adopted at the subsequent meeting,” the economists said. “In the current case, the argument for further rate cuts is even stronger than it might have been in prior episodes. The Fed will clearly take the view that ‘a stitch in time saves nine.’ Stabilizing the financial situation is paramount right now, as the Fed cannot allow things to go too far.”

However, Alan Levenson of T. Rowe Price said that the Fed may be willing to wait a bit and see what other central banks are willing to do. He also notes that in previous situations following an emergency cut, the rate was still at a relatively high rate. “At 1.5%, the funds rate is not far from the 1% level that could threaten the viability of money market funds,” he noted.

Michael S. Hanson of Barclays Capital said that while he expects the Fed to cut again later this month, much depends on what happens in the markets. “Should markets respond positively to the many initiatives enacted by monetary and fiscal authorities around the globe, the FOMC may be less aggressive in its interest rate decision at end October,” he said. However, “should markets take a further leg down before the end of the month a second intermeeting rate cut cannot be ruled out. Having started down this path, the Fed will act as needed in a timely manner to help restore confidence in the markets.” –Phil Izzo
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