US rates cutting strategy about to end The World Today - Thursday, 1 May , 2008 12:16:00 Reporter: Peter Ryan ELEANOR HALL: The US central bank has signalled that its aggressive interest rates cutting strategy could be about to end, as inflation concerns compete with the threat of a recession in the world's biggest economy.
In a sign that the US economy is continuing to falter, the US Commerce Department released sluggish growth and consumer spending figures overnight that suggest an official recession is only months away.
But while the US Federal Reserve today lowered rates by another quarter of a percentage point, higher inflation may mean this is the last of the rates cuts for some time.
Here's our Business Editor Peter Ryan.
PETER RYAN: This latest move caps seven interest rate cuts since September, when the impact of the global credit crunch brought on by the sub-prime mortgage meltdown forced America's central bank into emergency action.
The cutting has been so aggressive that economists like Chris Low of FTN Financial in New York, are almost conditioned for what's become a monetary policy groundhog day.
CHRIS LOW: I think it was so well anticipated that most of the thinking before the meeting was what will they say in the statement, rather than what will they do.
No surprise in the rate cut.
PETER RYAN: But as economists deciphered the language in the Fed's statement, there was one line that stood out.
EXCERPT FROM FEDERAL RESERVE STATEMENT: The substantial easing of monetary policy to date combined with ongoing measures to foster market liquidity should help to promote moderate growth over time.
PETER RYAN: Economists took that to mean the strategy of cutting rates could now be on hold, unless the US economy slows even further or falls into recession.
And two key words missing from the statement about "downside risks", that set the tone previously, put investors on the back foot, according to Chris Low.
CHRIS LOW: There is some surprise in that they removed the forward looking language that up and until now has suggested more rates to come.
Investors are looking at this and seeing it as an indication that the Fed figures it's done enough, that rates are where they need to be to get the economy going again.
PETER RYAN: Wall Street surrendered some substantial early gains and closed 12 points lower after the language, or the lack of it, in the Fed's statement became more clear.
And there was another red flag in the statement that the traditional policy of fighting inflation is back on the agenda once again, with some board members arguing the rates cutting policy isn't necessarily working.
RICHARD ILEY: There are these blockages in credit markets key longer term rates in the economy have not particularly fallen since the Fed embarked upon its very aggressive short term interest rate cutting campaign.
PETER RYAN: Richard Iley, chief economist at BNP Paribas in New York, says fresh economic data in the coming months will be crucial in swaying the central bank's sentiment.
RICHARD ILEY: Very clearly, there's strong differences of opinion at the Federal Reserve. There are two dissenters at this meeting, the same two who preferred a much smaller rate cut at the last meeting, so we've got at least two of the eight members voting on interest rates, quite opposed to any further monetary policy ease at this point.
They're much more worried about inflation than the majority of the committee, so that in itself is a reasonably significant impediment to further rate cuts moving forward.
PETER RYAN: Another piece of unexpected news came in official growth figures for the first three months of this year.
Instead of the forecast negative result, which would herald the makings of a recession, the US economy grew with the albeit sluggish annualised rate of 0.6 of one per cent.
But that was just enough for the US Treasury Secretary Hank Paulson to be cautiously optimistic.
HANK PAULSON: I believe we're closer to the end of this problem than we are to the beginning. I also believe that there inevitably will be some more bumps in the road before we get through this.
PETER RYAN: But could one, or more of those bumps, be another Bear Stearns - the top five investment bank which almost collapsed before being rescued by JP Morgan Chase?
Once again, Hank Paulson was being careful with his words.
HANK PAULSON: I sure don't see it, but I need to remind you that Bear Stearns wasn't on the radar screen a week before the problem.
PETER RYAN: Whatever way you look at it, the US economy is limping.
But some watchers are taking the "glass half full" approach, including Ed Lazear chairman of the US council of economic advisers.
ED LAZEAR: The way we see it is that this economy is one that's quite resilient and the reason I say it's resilient is that we've had some pretty major shocks, had credit market problems starting in the summer, and fuel prices obviously are not helping things.
Despite that, we continue to move along, albeit at a slower pace than we would like.
PETER RYAN: Meanwhile at the epicentre of America's economic woes, the housing meltdown is yet to peak.
Home prices have had their biggest fall on record - down 13 per cent in February.
And builders had less than a million new home contracts in March - the lowest demand in 17 years.
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