THE ECONOMY - Fed seen as likely to act moderately - Observers say Bernanke has many reasons to stop at a quarter-point cut -- for instance, the economy's still growing.
WASHINGTON — Despite a bad job report, jitters on Wall Street and a housing slump that could cause a recession in states such as California, Federal Reserve Chairman Ben S. Bernanke and a number of Fed policymakers appear deeply reluctant to try to jolt the economy by aggressively cutting the central bank's key short-term interest rate.
Although there's a chance they'll pare the federal funds rate by half a point, economists and longtime Fed watchers say the odds are that when the central bank's Federal Open Market Committee meets Tuesday, it will trim only a quarter-point from the rate, which now stands at 5.25%.
Lowering the rate would reduce borrowing costs on mortgages and other consumer and corporate loans, which in turn could lift the economy.
Among the reasons for the Fed's caution:
* The economy, aside from housing and related woes in the financial sector, continues to show moderate strength, and too sudden a move could touch off inflation.
* The sub-prime mortgage trouble that rocked financial markets this summer is not easily fixed by rate cuts.
* The Fed does not want to use large amounts of its rate-cutting ammunition all at once.
"I don't think there's the sentiment on the committee for a big cut right now," said Lyle Gramley, a former Fed governor now with the Stanford Washington Research Group in Washington. "They will wait for better evidence of spillover [from the housing slump] before they cut more."
The forecast that the Fed will cut a quarter of a point, widely shared among economists interviewed in recent days, represents a shift from just a week ago, when news that the nation's job base had shrunk for the first time in four years convinced many that the way had been cleared for the Fed to change course and slash rates to stave off a downturn.
Record exports, a week of rising stock prices and early signs that frightened credit markets were beginning to function again contributed to the change in view.
A modest rate cut could be a disappointment for California, which is now learning how dependent its economy had become on housing.
Last month, home sales in most Southern California neighborhoods plunged 36% from a year ago to a 15-year low for August. Meanwhile, a new estimate by the California Budget Project found that nearly 60% of the jobs added in the state from 2000 to 2005 were housing-related.
