Fed officials considering further rate cuts: report

Thu Oct 2, 2008 6:51am EDT

TOKYO (Reuters) – Federal Reserve officials are weighing further interest rate cuts, even if Congress approves a $700 billion financial industry bailout, because of a worsening economic outlook, the Wall Street Journal said on Thursday. A rate cut is still far from certain, partly because of inflation worries, the WSJ said in an unsourced report on its website.

“The Fed’s willingness to consider additional rate cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks,” the Wall Street Journal said.

Currency traders in Tokyo said that while there was some chatter about the article among market players, the impact on the dollar seemed to be limited.

The dollar index, which measures the dollar’s value against a basket of six major currencies, rose 0.6 percent on the day to 80.162.

Even before the article, investors were bracing for the Fed to lower interest rates as early as this month.

Market players have sharply increased their bets for an aggressive Federal Reserve interest rate cut after data released on Wednesday showed that U.S. factory activity shrank in September to its lowest since the 2001 recession.

U.S. short-term interest rate futures show that investors are bracing for the Fed to cut interest rates by at least a quarter percentage point at its policy meeting in late October.

The implied chance of a bigger, half-point rate cut to 1.5 percent is now seen at 60 percent, up from around 10 percent seen on Tuesday.

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