Fed's Meeting More Closely Watched Than Most

Investors are eagerly awaiting news from the Federal Reserve today, as Chairman Ben Bernanke meets with his colleagues to consider further interest rate cuts barely a week after they were sliced an aggressive three-quarters of a percentage point.

Most economists expect Mr. Bernanke to announce a one-half a percentage point cut in the federal funds rate when the meeting ends this afternoon, bringing the Fed's key rate to 3%. This could make America's economic downturn less painful, but might also lead to considerable inflation.

"This is not just an ordinary meeting," a senior economist for Mesirow Financial Holdings Inc., Adolfo Laurenti, said. "There are some real issues at stake. We are all watching very closely."

In anticipation of further interest rate cuts, stock markets edged up slightly yesterday: The Dow Jones Industrial Average Index rose 96.41, or 0.78%, to 12,480.30, while Standard & Poor's 500 Index climbed 8.34, or 0.62%, to 1,362.30. The Nasdaq Composite Index advanced 8.15, or 0.35%, to 2,358.06.

"The Fed has to be wary of the consequences of not doing that which is expected," the chief economist at Nomura Securities, David Resler, said. If the Fed were to make a more modest one-quarter of a percentage point cut, disappointed traders could send stock markets sharply down, he said.

Because most of the effects of the expected one-half a percentage point cut is already priced into the market, many economists predict that the language the Fed chooses in its policy statement today could have an unusual amount of sway on markets. The statement will likely provide a sense of how willing the Fed will be to make further interest rate cuts in the near future.

"Striking the right balance in Wednesday's policy statement will require careful wording," the chief economist for Wrightson ICAP, Lou Crandall, wrote in a research note. "The goal is to appear flexible rather than stubborn and — most important — to instill confidence rather than prolong the crisis atmosphere."

Two unexpectedly positive pieces of economic data were released yesterday, further complicating the Fed's decision-making process: The U.S. Census Bureau said new orders for durable goods, or items that are designed to last for three years or more, jumped by 5.2% in December, significantly more than analysts had expected. The Conference Board, an independent research firm, reported that its index of consumer confidence for January also beat expectations.

Both reports cast doubt over the necessity of a relatively large one-half of a percentage point rate cut. "The sense of urgency about the economy is not completely justified, given the numbers for durable goods," Mr. Laurenti said.

He said the Fed would do better to keep a closer eye on the impact that rate cuts will have on inflation and the value of the dollar. "It's not a pretty picture on the inflation front," he said. "The headline numbers for 2007 were not good, and the numbers for core inflation were not that good either."

The dollar fell to record lows against gold during trading yesterday, to less than 1/933rd of an ounce of gold ahead of an expected interest rate cut by the Fed. It is widely expected that additional interest rate cuts would further weaken the dollar and add to gold's appeal as a hedge against inflation. Stock markets around the world also rebounded yesterday in anticipation of further interest rate cuts from the Fed. London's FTSE 100 index rose by 1.66%, while Germany's benchmark DAX Index climbed 1.09%. In Asian trading, Tokyo's Nikkei stock average closed up 2.99%, while Shanghai's main index improved 0.87%.