WASHINGTON — After cutting interest rates five times in six months, Federal Reserve policy-makers are pondering what more they need to do to restart the ailing economy.
The Fed’s mid-afternoon announcement is widely expected to be that the central bank is cutting interest rates for a sixth time. But economists on Tuesday were split over whether the Fed will stick with the half-point moves it has been making so far this year or switch to a smaller quarter-point reduction.
“We know they are going to cut rates, but it will be the closest call this year on just how much,” said David Jones, chief economist at Aubrey G. Lanston & Co. in New York. The Fed’s answer probably will depend on what carries greater weight – recent glimmers that the economy is starting to pull out of its yearlong economic funk or concerns that the recovery could still be derailed if Americans suddenly grow worried about their job prospects and stop spending. Three reports released Tuesday as the central bank began its deliberations all depicted an improving economy but were not enough to lift spirits on Wall Street. The Dow Jones industrial average suffered its third straight losing session, falling 31.74 to close at 10,472.48.
The Dow had lost more than 100 points on both Monday and Friday as investors fretted about a stream of company profit warnings and layoff announcements.
The economic indicators were more favorable, however. Consumer confidence rose for a second straight month, orders to U.S. factories for big-ticket manufactured goods from cars to computers jumped by 2.9 percent in May, the biggest gain since February, while sales of new homes rose a solid 0.8 percent with all parts of the country enjoying increases.
Some analysts said they believed these latest reports would convince the central bank that only a quarter-point cut in rates is needed to assure a solid rebound in the second half of this year, especially in light of recent comments by some Fed members of the potential danger of overdoing the credit easing and spawning inflation problems next year.
“The Fed is trying to walk a fine line between those who still want more aggressive easing and those who think they may have already done too much,” said Bill Cheney, chief economist at John Hancock Financial Services in Boston.
Beginning on Jan. 3, the Fed has cut interest rates five times in half-point moves that marked the central bank’s most aggressive credit easing in 19 years.
Those cuts have pushed the federal funds rate, the interest that banks charge each other, from 6.5 percent down to 4 percent, a move that has been matched by commercial banks, which have lowered their prime lending rate, the benchmark for millions of consumer and business loans, from 9.5 percent down to a seven-year low of 7 percent.
All those reductions were made in an attempt to jump start a sluggish economy, which has been posting sub-par growth rates for a year.
Economists who are looking for a sixth half-point cut in rates on Wednesday said they believed the central bank is still not convinced it has done enough to prevent an outright recession, something the country last experienced in 1990-91, the only downturn during Federal Alan Greenspan’s 14 years as Fed chairman.
“I don’t think Chairman Greenspan wants to take any chances of another recession,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “He still wants to buy a sizable insurance policy.”
While economists are split on the size of Wednesday’s rate cut, they are in general agreement that the rate reductions are drawing to a close.
Jones said he was looking for two more quarter-point rate cuts at the Fed’s next regularly scheduled meetings in August and October, but other analysts said Wednesday’s move may be it for this easing cycle, particularly since consumers will start seeing their tax cut rebate checks next month.
“The rate cut we see tomorrow could well be the last because the economy should in fact start to show signs of stabilizing during the next two months as the interest rate cuts and tax cuts take hold,” said Lynn Reaser, chief economist at Banc of America Capital Management.
The Fed got the go-ahead Tuesday for further rate cuts from the International Monetary Fund, which issued its annual report card on the U.S. economy, saying that the Fed had the room to do more if necessary because inflationary pressures have remained well contained.
The IMF did warn that the strong U.S. dollar could weaken significantly in coming months because of America’s high trade deficits.