WASHINGTON (AFP) — Even as an economic storm intensifies, the US Federal Reserve is likely near the end of its interest rate-cutting cycle with policymakers awaiting the impact of a massive stimulus in the pipeline, analysts say.
The Federal Open Market Committee headed by chairman Ben Bernanke is widely expected to trim its federal funds rate by a quarter point to 2.0 percent at a two-day meeting concluding Wednesday, say economists.
But some Fed-watchers say this may be the last cut for some time.
Although the economy is believed to be barreling toward recession, a number of steps have been taken to mitigate the downturn.
The Fed has already slashed rates by three full percentage points since September, and the impact of those cuts likely will 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 kicks in soon with the government sending rebate checks to tens of millions of households in an effort to boost consumer spending.
In view of the stimulus in the pipeline and worries about resurgent inflation, the Fed is likely to be more cautious about additional cuts, say analysts.
Peter Berezin, global economist at Goldman Sachs, says he believes the Fed does not 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."
Deutsche Bank economist Mustafa Chowdhury said the Fed must be concerned about destabilizing effects of a further fall in the dollar that could result from more rate cuts.
"The falling dollar and rising inflation increases the likelihood that the Fed is near the end of its easing cycle," he said in a note to clients.
Chief economist John Ryding at Bear Stearns said the Fed has widely opened up credit to the brokerage sector and banks and in doing so "massively reduced the systemic risk of a financial meltdown."
As a result, he sees "a significant downshifting in the pace of interest-rate reduction."
"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," Ryding said.
"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."
Nariman Behravesh, chief economist at Global Insight, said the Fed may want to take out more insurance against an economic meltdown and offer more rate cuts, albeit at a more gradual pace.
"I think they will cut by 25 basis points and there is a chance they will cut again in June by 25 basis points," Behravesh said. "And then they will be done."
But some fear that data such as the past week's grim reports on the housing sector may induce the Fed to stay aggressive. Reports showed sales of new US homes plunged to their lowest level in over 16 years in March, with prices down 13 percent year-to-year.
Rishi Sondhi, economist at RBC Financial Group, said that with housing so weak, "the Fed will likely see the need to cut interest rates further."
"We continue to lean towards 50 basis points coming next week followed by 25 basis points in June," he said.
Economist Ethan Harris at Lehman Brothers said the Fed's easing cycle "is far from over" even though the pace may slow. He expects a quarter-point cut on Wednesday and more cuts in December, January and March to bring the funds rate to a low of 1.25 percent.
"It is true that in normal times, the 300 basis points of Fed easing thus far would be quite stimulative, adding more than three points to GDP (gross domestic product) growth in the second half of this year," he said.
"However, these are not normal times. The only part of the policy transmission mechanism that is working is the weaker dollar helping to sustain solid export growth. The other channels of policy -- market interest rates, asset prices, and bank lending -- are either clogged or are working in reverse."
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