The Federal Reserve will wrap up a two-day meeting today which is expected to result in a 13th drop in interest rates designed to light a fire under a flagging US recovery.
Top Wall Street dealers were unanimous in anticipating a reduction in the current 1.25 per cent federal funds rate by either a quarter or a half percentage rate - taking it to the lowest level in 45 years.
The Fed likely will stick with an assessment that risks to the economy are tilted to the downside because of deflation worries, a position adopted at its last policy session on May 6th, economists said. Since the world's largest economy slipped into a mild recession at the start of 2001, the Fed has brought down its key fed funds rate - for overnight loans between banks - from 6-1/2 per cent to its current 42-year low.
Growth resumed in 2002 but haltingly, at around a 2 per cent annual rate, far below its generally accepted potential rate of 3 to 3-1/2 per cent. The national unemployment rate crept up to per cent from below 4 per cent in late 2000.
Meanwhile, the "output gap" between the economy's potential and actual performance has widened, so analysts say the Fed wants growth to exceed that traditional potential pace for a time, to absorb excess capacity and foster job creation.
Mr Dick Berner, an economist with Morgan Stanley in New York said the Fed will signal it will do everything it must to revitalize growth and dampen deflation fears.
"We can see at least two or perhaps more years of above-trend strong growth without closing that gap," Mr Berner said, adding, "Certainly it's part of my own view that inflation is not likely to be a problem soon so we can afford stimulative policies to get the economy back on track."
He said he expects economic expansion at around a 3.5 per cent annual pace over the second half of 2003, a sharp rise from the 2 per cent rate they expect for the second quarter.