Fed Report Seen Pointing to Further Cuts in Rates

The U.S. economy is still growing but at a slower pace, the Federal Reserve said Wednesday in a report that economists interpreted as an indication that the central bank had room to cut interest rates further.

In a survey of economic conditions around the country, the Fed found that the “nation’s economy continues to grow slowly,” with weak auto sales, generally sluggish consumer spending and some declines in manufacturing output.

The slowdown this year was caused in part by a yearlong battle waged by the Fed to drive interest rates higher as a way of dampening demand and cooling off inflationary pressures.

The Fed switched course in June, however, and began nudging interest rates lower in an effort to keep the economy out of a recession.

Expects Fed Action Many analysts interpreted the Fed’s new economic survey as an indication that the central bank, while not overly worried about an imminent economic downturn, was ready to lower interest rates further if the economy showed continued weakness.

“This report says that the Fed believes the economy is slowing down but there is no imminent danger of a recession and inflation doesn’t look like as big a problem as it did a few months ago,” said David Wyss, an economist with DRI-McGraw Hill.

Wyss said that while the Fed would ease interest rates further in coming months, “they are not in a big hurry to do it.”

Michael Evans, head of a Washington forecasting firm, noted that the bond market initially sagged when the report was released because traders had anticipated a gloomier Fed assessment of growth prospects. Evans said he believed that the Fed will still push interest rates lower in coming months but only as inflationary pressures abate.

“The economic reports and this outlook suggest that the Fed’s ‘soft landing’ has been achieved,” said Evans. The central bank has been trying to slow the economy enough to dampen inflationary pressures without toppling the country into a downturn.

Fed interest rate decisions are made by the 12-member Federal Open Market Committee, composed of members of the Fed board and the presidents of five of the 12 regional banks. The policy-makers meet eight times a year, with the next session scheduled for Aug. 22.

To prepare for those meetings, the Fed surveys the regional banks about economic conditions in their areas. Wednesday’s report, known as the “beige book” or “tan book,” is the latest compilation of those views.

The report said retail sales were generally sluggish nationwide, with auto sales below last year’s levels everywhere except Texas, a state where car sales have increased sharply. About the only strength nationwide in consumer spending over the summer has come in sales of women’s clothing, the report said.