Fed Likely to Weigh 0.25% vs. 0.50% Cut Next Week

Influential Wall Street Journal fed-commentator Greg Ip says a rate cut at next week's FOMC meeting is "likely"; what remains to be seen is how and how much the Fed will drop its key rates. The current outlook, fostered after Bernanke and key officials hinted to further rate cuts last week (full story I, II) is in stark contrast to the prevailing view until recently, namely that the Fed saw the economy as "balanced" and would withhold further interest rate cuts unless things got much worse.

Fed officials' main concern, Ip says, is not the economy, though recent data have leaned to the 'soft' side, nor the stock market, but rather the possibility that banks and other lenders will tighten their lending to small and medium-size businesses much as they already have to home borrowers, a move that could inhibit economic activity in credit-sensitive sectors. Futures markets currently expect a minimum 0.25% cut when the Fed meets on Dec. 11, and give a 66% probability to a 0.50% cut to the key fed funds rate. Some analysts say the Fed is more likely to cut rates by a quarter point, and adjust its statement to exclude the notion that weak U.S. economic growth and higher inflation are equally balanced, thereby leaving the door open for further cuts without an implied promise it will do so.

Additional Reading: How I'm Playing The Fed's Upcoming Cut

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