Expect A 25-Basis-Point Cut In U.S. Interest Rates

By John S. McClenahen New data on U.S. industrial production and consumer prices suggest the Federal Reserve next week will lower short-term interest rates by 25 basis points rather than 50 basis points some economists have been suggesting. The Fed's Federal Open Market Committee (FOMC) meets Aug. 21 to consider lowering the influential federal funds rate. A cut would be the seventh this year. U.S. manufacturing output held steady in July, following nine consecutive monthly declines. "It appears that we are now in the trough of the business cycle," says David Heuther, an economist at the National Assn. of Manufacturers, Washington. And, as Bruce Steinberg, Merrill Lynch & Co.'s chief economist likes to say, inflation is a non-issue. The U.S. Labor Dept.'s Consumer Price Index (CPI) fell 0.3% in July, its first monthly decline since April 2000. For the 12-month period ending in July, the CPI increased just 2.7%. "We still expect the Fed to cut the funds rate by 25 basis points at next week's FOMC meeting and to retain its bias toward easing," says Steinberg. "While the economy is stabilizing, a rebound is yet to develop." Indeed, the Philadelphia Federal Reserve Bank's current conditions index fell sharply this month. "Though this index only represents a survey of 250 manufacturing firms in the Philadelphia area, the data suggest some of the improvement in the manufacturing sector wasn't sustained toward the end of July," notes Steinberg.

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