US Fed ready to cut interest rate

The US housing market remains slow despite successive rate cuts

The US central bank, the Federal Reserve, is widely expected to announce a cut in interest rates to 2% from 2.25% later on Wednesday.

Policy makers began their two-day meeting on Tuesday amid signs that economic growth has stagnated.

The economy grew 0.6% in the first quarter, above analyst expectations.

The Fed has cut rates five times from a 5.25% level last summer, and inflation risks may prompt it to keep rates on hold from now on.

Keep cutting

However several indicators point to the need for a further rate cut now.

Fears of inflation are likely to limit the Fed's generosity on the rate front and we only expect a quarter-point cut on 30 April John Ryding, Bear Stearns Can the US economy be revived? US economy at a glance

Commerce Department figures showed that the economy grew 0.6% in the first quarter, better than expectations though consumer spending, a key driver of the American economy, grew just 1%.

Growth slowed sharply to an annual rate of just 0.6% in the last quarter of 2007.

The closely-watched Case Schiller house price index for the 20 major metropolitan areas is now falling at an annual rate of 12.7%.

"My best guess is they want to buy a little more insurance against an economy that looks like it is in recession," said Lyle Gramley, a former Fed board member with the Stanford Financial Group.

Rising prices

But rising inflation risks and previous action by the central bank and Congress to pump money into the economy make the case for a pause in rate cuts soon.

As well as cutting rates the Fed has lent billions of dollars to banks, who find it difficult to borrow money in the wake of the collapse in the sub-prime mortgage market.

At the same time, high oil and food prices have pushed up the US inflation measure, CPI, to 4%.

With oil prices now close to $120 a barrel, and the cost of staple foods continuing to rise, the Fed may be reluctant to cut rates aggressively in case prices rise further.

Lower US interest rates have also sent the dollar lower, as investors have put their money in Europe and the UK, where rates are higher.

"The Fed's hope that falling oil prices will ease inflation pressures looks something of a remote one at this time," said John Ryding, Bear Stearns chief economist.

"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 30 April," he added.