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The Federal Open Market Committee headed by chairman Ben Bernanke is expected to cut the interest rates finally for some time on Wednesday, as worries about resurgent inflation rose, The Economist Times reported.
According to the news reported, Peter Berezin, global economist at Goldman Sachs, said he believed the Fed didn't want to go lower than two percent, an interest rate that would provide considerable stimulus to the lagging US economy.
"We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions," Berezin said. "Obviously if the turmoil resurfaces, they will be apt to cut rates again. But barring that, they would like to stabilize rates." he added.
"The US appears to have slipped into recession, which is likely to keep the Fed wanting to lean further against growth headwinds with monetary ease," Chief economist John Ryding at Bear Stearns quoted as saying by The Economist Times.
"However, the inflation story continues to deteriorate and, with oil almost at 120 dollars per barrel, the Fed's hope that falling oil prices will ease inflation pressures looks something of a remote one at the present time. In short, fears of inflation are likely to limit the Fed's generosity on the rate front and we only expect a quarter-point cut on April 30." Ryding added.
Inflation expectations have risen over the past month, yields indicate. Ten-year Treasury Inflation Protected Securities yield 2.33 percentage points less than regular Treasuries, versus 2.25 points on March 25. The difference reflects the pace of inflation traders expect over the next decade. The annual pace of inflation has more than doubled to 4 percent since August.
CUTS WILL END
On the other hand, traders in interest-rate futures saw that Federal Reserve would halt its cycle of interest-rate reductions as soon as this month's policy meeting. They gave about a 25 percent chance the Fed would keep its main rate unchanged at 2.25 percent on Wednesday after six rate cuts since September.
"What we're seeing now is a big shift in market sentiment regarding the Fed," said Gary Pollack, who helped oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. "The feeling is the Fed may pause after it meets next week." he was quoted as saying by Bloomberg.
Ten-year note yields climbed a fifth straight week as crude oil set a record high, fanning concern that rising prices for food and energy would cause inflation to accelerate.
But while Wall Street finally appeared ready to hear that rates might stay put, a halt to rate cuts would not be a completely positive sign. Sure, it would suggest that the Fed believes economic risks are easing, but it would also indicate the central bank is growing more worried about the threat of inflation.
The Fed has already cut rates six times since last September, and arranged lending programs to increase trading in the money markets the impact of those cuts and measures likely would take several months to be felt in the economy.
Additionally, a 168-billion-dollar economic stimulus plan approved by Congress and enacted by President George W. Bush kicked in soon with the government sending rebate checks to tens of millions of households in an effort to boost consumer spending.
The European Central Bank last week raised rates amid concern of accelerating inflation.