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 cumulative
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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