Fed Forecasts Spur Traders to Ignore Warnings, Bet on Rate Cuts

The Federal Reserve's first set of quarterly economic forecasts fueled speculation that it will cut interest rates again, contrary to warnings by policy makers in the past two weeks.

The degree of ``uncertainty'' about the growth outlook is greater than that for inflation, officials said in a supplement to minutes of their October meeting released yesterday. While officials expressed confidence price increases will ease, they viewed markets as ``still fragile and were concerned that an adverse shock'' would worsen economic risks.

The wariness about a continued credit collapse pushed odds of a rate cut next month up to 92 percent, according to federal funds futures, from as low as 70 percent. Investors differ with Chairman Ben S. Bernanke and other officials, who have said this month that the dangers of a slower expansion and faster inflation were ``roughly'' balanced.

``Risks aren't balanced,'' said Michael Feroli, a former Fed board staff member who is now an economist at JPMorgan Chase & Co. in New York. ``Recent developments in financial markets increase the likelihood that they will ease.''

As part of its new release on the three-year economic estimates of Fed governors and district-bank presidents, the central bank discussed risks to the outlook. ``Most participants judged that the uncertainty attending'' their growth forecasts ``was above typical levels seen in the past,'' the Fed said.
financial-stock.com