Fed Reins in Growth Forecast

Fed Chairman Ben S. Bernanke has left the door wide open to cutting interest rates further to try to prevent a recession, and financial markets are pricing in a high likelihood of a half-percentage point rate cut at the Fed's next meeting March 18.

"They seem to be leaning toward another rate cut at this point but have chosen not to give the market a whole lot of guidance on what to expect," said Peter Hooper, chief economist at Deutsche Bank Securities.

Several of Bernanke's policymaking colleagues appear to be more worried about inflation than the chairman is, based on his congressional testimony last week and their recent speeches.

"At any given time, policymakers could pursue a powerfully expansionary policy to all but eliminate the possibility of a significant recession in the year ahead, but doing so would come at the cost and even likelihood of an unacceptable increase in the rate of inflation," said William Poole, president of the Federal Reserve Bank of St. Louis, in a speech yesterday. His counterparts Jeffrey M. Lacker in Richmond, Charles Plosser in Philadelphia, Richard Fisher in Dallas, and Thomas Hoenig in Kansas City, Mo., have expressed similar hawkishness about inflation.

Many analysts outside the Fed are not as worried. "If you continue to see this kind of report, it could constrain them a bit," said Andrew Tilton, an economist at Goldman Sachs. "But if you look in the details, most of these sources of inflation are transitory."

The Fed also released minutes yesterday of its meetings in January that led to a combined cutting of the short-term interest rate it controls by 1.25 percentage points. In a Jan. 9 conference call, the policymakers agreed that the worsening economy warranted a significant reduction in interest rates; the next day, Bernanke delivered a speech that strongly hinted that rate cuts were coming.

Then, on Jan. 21, the day stock markets around the world plummeted, the central bankers met again by videoconference, concluding that they needed to make a surprise rate cut. But some members were worried that the move would be perceived as a reaction to the stock market drop, not to the underlying economic situation.

Moreover, there were hints that the Fed would be inclined to raise rates as soon as the economy strengthens. "Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated," the minutes said.

Also yesterday, the number of housing units started in January rose 0.8 percent from a low December level, the Commerce Department reported. However, in an indicator with greater predictive power, the number of permits issued for new housing units fell 3 percent.