Federal Reserve Ready To Lower Interest Rates

The Federal Reserve began the two day Federal Open Market Committee (FOMC) meeting that will culminate in an interest rate decision tomorrow. Economic forecasters predict that the Fed will reduce the Fed funds rate by a quarter-point to 2.0%. The rate was as high as 5.25% last September.

It is likely the Fed will pause after this meeting to determine the effects of its prior rate reductions and analyze their impact. Pressure is building to end the easing in the form of record high commodity prices in food and energy. The dollar has weakened to record low levels and outside the housing sector the economy is not as weak as expected. Stock market prices have increased lately and indications are the credit crisis is improving. Also consider the $152 billion tax rebate stimulus and the lagged effect of 3% of prior easing.

Recently weakness in the housing market has been offset by strength in the job market. The Labor Department reported that claims for unemployment benefits fell by 33,000 to 342,000. Forecasters had been expecting a rise of 3,000. The Case-Shiller home price index indicated home prices fell by 12.7 percent in February compared to a year earlier. The index dropped 10.7 percent in January and 9.1 percent in December. The cities with the largest annual price declines were Las Vegas 22.8 percent, Miami 21.7 percent and Phoenix down 19 percent.

Robert Shiller, the Yale professor who invented the index, said that home prices could fall more than the 30 percent drop of the 1930s depression. Housing inventory has soared to record levels as home mortgage financing has restricted and foreclosures add to the supply. Over one million units are still under construction and experts expect the inventory overhang to persist and continue to apply downward pressure on prices.

For a chart of home prices the last 12 years please follow this Case-Shiller and OFHEO Indices link.