Risk Of Deflation: What Will The FOMC Do?

By John S. McClenahen The Federal Open Market Committee (FOMC) didn't use the word "deflation" in describing risks to the U.S. economy last week. Instead, in a statement, the panel referred to an "unwelcome substantial fall in inflation." What is clear, however, is that the U.S. economy is operating well below its potential annual growth rate of about 3.5%. David A. Rosenberg, chief North American economist at Merrill Lynch & Co., New York, believes the FOMC needs to ease short-term interest rates some more. He foresees the FOMC cutting the target for the influential federal funds rate by 25 basic points to 1% at its June 24-25 meeting and then by another 25 basis points to 0.75% at its Aug. 12 meeting. The federal funds rate, the interest banks charge each other on overnight loans, is now at 1.25%, a four-decade low. However, if the June 6 employment report from the U.S. Labor Department is weak, Rosenberg figures a 50-basis-point cut in the federal funds rate to 0.75% at the FOMC's June 24-25 meeting might be in the offing.

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