While the Federal Reserves aggressive drive to lower interest rates appears to be over, there could be benefits for consumers in other places — like some relief from soaring gasoline and food costs.
"With the Fed on hold and the dollar firming, oil and gasoline and food prices may all top out some time in the next few months," said Mark Zandi, chief economist at Moody's Economy.com.
On Wednesday, the Fed cut interest rates for a seventh straight time. But the reduction was a much smaller quarter-point move — not the half-point and three-fourths-point moves of earlier this year. It pushed the federal funds rate down to 2 percent.
Commercial banks immediately followed suit by cutting the prime lending rate, the benchmark for millions of consumer and business loans, to 5 percent, the lowest level since late 2004.
That may be as low as consumer rates go during this Fed easing cycle because the central bank sent a number of signals that it believed it may have done enough to keep the economic slowdown from deepening into a severe recession.
Several analysts said the central bank was recognizing the realities of the situation that it may have done all it should do to try to boost growth through rate cuts, given growing threats from inflation.
"The Fed may have gotten to the point where it could start hurting economic prospects in terms of the value of the dollar and oil prices and grain prices," said Sung Won Sohn, an economics professor at California State University. "It think it was time for the Fed to slow down and take a pause."
Lower U.S. interest rates tend to make the dollar's value against other currencies weaker because investors dump their U.S. holdings in favor of investments in other countries where they can earn a higher interest rate.
As the dollar falls, that tends to drive the cost of oil higher because oil is priced in dollars and producers start demanding higher prices to compensate for a weaker dollar. Those forces are also at work in terms of driving up other globally trade commodities such as metals and food including wheat and other grains.
With the Fed lowering the prospects for further rate cuts, the dollar can be expected to stabilize and perhaps rebound from the record lows it had hit in recent weeks against the euro and other currencies. That should help various commodities including oil and food to backtrack from their recent record highs, a process that may have already started.
Oil, which fell on the Fed's Wednesday announcement, dropped further in trading on Thursday as the dollar continued strengthening against the euro and other currencies. In trading on the New York Mercantile Exchange, crude oil dropped $3.03 to $110.43 a barrel, its lowest level since April 14 and down significantly from the record near $120 per barrel earlier in the week.
Analysts said it will take time, however, for motorists to see the benefits in lower gasoline costs, which hit another record nationwide average of nearly $3.623 per gallon of regular on Thursday, according to a survey of stations by AAA and the Oil Price Information Service. Analysts said gasoline is likely to keep heading higher for a time because refiners have not been able to raise their prices fast enough to recoup the crude oil surge that has already occurred.
But private economists believe that if the dollar does stabilize and oil and other commodities begin to fall in a sustained way, consumers will start seeing benefits in two to three months.
As expected, the Fed's Open Market Committee served up just a quarter-point cut Wednesday, leaving the benchmark for overnight loans between banks at just 2 percent — down from 5.25 percent when the rate slashing began last summer.
Some Fed watchers say we may see one more cut before the Fed pauses to see if its easy-money policy has the desired effect of boosting a sagging economy — without setting off another upward price spiral. But the comments attached to Wednesday's decision lead some to believe the Fed is headed for the sidelines.
I think they're going to pause right now and that's the message we should be taking away," said former Fed Governor Susan Bies.
Fed Chairman Ben Bernanke and his colleagues may have little choice.
That's because soaring food and energy prices are beginning to spill over into the wider costs of other goods and services. And the quickest known antidote to higher inflation is to move interest rates back up again.
In explaining Wednesday's decision, the FOMC put less emphasis than in prior meetings on the risks of an economic downturn, and noted that " uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."
Those developments include a continued surge in oil and gasoline prices. Oil recently came within a dime of $120 a barrel to set a record. Pump prices are up 55 cents a gallon in the past 10 weeks. Credit Suisse economist Jonathan Basile estimates that each penny at the pump costs American consumers roughly $1 billion in spending power.
So even as $150 billion in rebate checks begin showing up in taxpayer accounts, about a third of that stimulus money will already have been spent to pay for higher fuel costs.
Rate cuts have been the Fed’s main weapon against a slowdown, but each move usually takes at least six months to begin having the desired effect. While the economy has been flashing recession signals in the latest monthly data, Wednesday's report on growth in the fourth quarter of last year showed that the national Gross Domestic Product inched head at just 0.6 percent. Though very weak, the data have yet to confirm the economy is in outright recession. If, as many economists currently believe, the economy emerges from a shallow decline by year-end, the Fed is concerned that continued rate-cutting could make inflation worse when things begin to pick up again.
So far, the latest series of rate cuts seem to have had only mixed success with a more immediate goal — calming financial markets.
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