Fed Minutes Suggest Pause In Rate Cuts

The Federal Reserve hinted in the minutes from its April FOMC meeting that it will not be cutting rates again in the near future, although it expects weak economic times ahead. The minutes, released Wednesday, include higher employment and higher inflation forecasts in part from surging commodity prices. The Fed also lowered its growth forecast, although it suggested the worst of the credit crunch may have passed.

In the minutes from the April meeting, which took place on the 29th and 30th, the Fed said that only a significant weakening of the economic outlook should move policy makers to further cut rates. In April Bernanke & Co. cut 25 basis points off the federal funds rate, bringing it to 2 percent. For the third consecutive meeting the decision to cut rates was not unanimous, with Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissenting in favor of no change. The minutes revealed that the decision to cut was a "close call."

Lingering problems in the housing and credit markets along with soaring energy prices contributed to the cut in the Fed's growth forecast. In February, the Fed had forecast gross domestic product growth between 1.3 and 2 percent. The Fed slashed that forecast at the April meeting, now predicting GDP growth between 0.3 percent and 1.2 percent in 2008.

They are also expecting higher unemployment, between 5.5 percent and 5.7 percent this year. Previously, the upper end of the Fed's forecast had unemployment set at 5.3 percent.

Rather than continue to lower interest rates, the Fed will wait and see the impact of its rate cuts - which has lowered the federal funds rate by 325 basis points since September - combined with the economic stimulus. Inflation was clearly an area of concern, as rising food and energy prices that have boosted headline inflation threaten to trickle down to push up core inflation.

Inflation is now expected in the range of 3.1 to 3.4 percent this year, a full percentage point higher than the old forecast of between 2.1 percent to 2.4 percent in 2008.

"Most members viewed the decision to reduce interest rates at this meeting as a close call," the minutes read. "Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices."

In keeping with recent comments from several Federal Reserve officials, the FOMC expects that economic activity will pick up in the second half of the year. Although many have predicted that the pick-up will still leave growth quite sluggish, by 2009 the Fed is expecting the impact of its interest rate cuts and the economic stimulus to normalize GDP.