As usual, the decision by the US Federal Reserve Board was anticipated by markets — it lowered rates by another 25 basis points to 2% — the market was focused upon the accompanying statement, which economists see as signaling a pause in the rate cutting.

National Bank Financial points out that the Fed has now cuts rates 325 bps since last fall. “Though the Fed continues to acknowledge the weakness in residential real estate and ongoing tightness in credit markets, it now believes that the substantial easing in monetary policy mitigates the risks to economic activity,” NBF reports. “Consequently, the FOMC opted to drop its reference that ‘downside risk to growth remains’ from its statement.”

“In effect, the Fed is signaling its intention to remain on the sidelines for the time being,” NBF concludes. Indeed, two of the 10 Fed governors voted for no change in rates this time around.

TD Economics says that the economic assessment by the Fed was not quite as bad as feared. It adds that, on the inflation front, there was a small surprise in that the Fed noted that “readings on core inflation have improved somewhat.”

“With respect to the bias, the Fed was uncharacteristically mum about the matter. The interpretation of this statement suggests that the hawks may be growing in fortitude, in that they do not make any mention of downside risk. Moreover, their lack of explicit bias suggests that the Fed is neither signalling another rate cut going forward, but by not, mentioning a bias, they are leaving the door open for another cut, should it become necessary,” TD concludes.

“In our opinion, today’s decision was warranted as the Fed needs to assess over the next couple of months the pass-through of previous policy moves and the impact of the tax rebates now being sent out to households,” adds NBF.

Ahead of this meeting, some economists were starting to worry that the Fed was on the verge of going too far with its cuts.

Morgan Stanley economists predicted that 2% will prove to be the trough for this cycle. Previously, it thought the Fed would stand pat at 1.75%. “The difference is more than cosmetic; it reflects our and likely the committee’s sense that upside risks to inflation are now nearly as important as the downside risks to growth,” it explains.

“Looking ahead, we think the Fed will keep policy on hold for the balance of this year. That forecast reflects our view that downside risks to the economy will persist into early 2009. It gives the Fed options: If the economy weakens significantly again after the temporary impact of the fiscal stimulus fades away, the FOMC could certainly cut rates further. However, our base case is that the economy does not double dip, and therefore we continue to expect the Fed to remain on hold through the second half of the year,” Morgan Stanley says. “A renormalization of monetary policy is likely to begin around mid-2009.”

Canadian economists are more skeptical in their forecasts. “For our part, we continue to believe that these measures will not be sufficient to fully offset the negative impact of deteriorating labour markets,” comments NBF. “Given our current forecast calling for an unemployment rate of more than 6% by the year-end, we still view the balance of risks remaining tilted to the downside. As such, we still think that the Fed will need to maintain an easy monetary policy well into 2009 as below-trend GDP growth and excess capacity ease inflationary pressures.” It sees another cut this year.

TD expects the Fed to deliver an additional 75 bps of rate cuts, based upon its below consensus economic view. “The way the Fed details the weakness in the economy suggests scope for a bit more monetary stimulus, but there is clearly a need to see how the balance of risks between growth and inflation unfold,” it concludes.