The US Federal Reserve is today likely to cut short-term interest rates for the seventh time this year but analysts will be on the alert for signs that the central bank may soon call a halt to its most aggressive easing in more than decade.
Yesterday, the US government posted a monthly budget surplus of $2.52 billion for July, surprising economists who had been forecasting a deficit. The figure was sharply down from the surplus of $5.06 billion in the same month a year earlier.
However, economists had tipped a deficit of $3.7 billion in the month as revenues were eroded by tax rebates being sent out as part of President Bush's tax cut programme.
Meanwhile, the euro fell back slightly against both sterling and the dollar in quiet trading ahead of the Fed meeting. The euro closed at $0.9133, compared to $0.9158 on Friday. It closed at 0.6321p sterling, down from 0.6338p on Friday.
The Fed's policy-making open market committee is widely expected to cut its target for the federal funds rate its key monetary policy instrument by a quarter of a percentage point to 3.5 per cent, bringing the cumulative reduction in interest rates since the start of the year to 3 percentage points.
However, fed funds futures prices have rallied in recent weeks, registering the possibility of a half-point cut. With mixed signals on whether the US economy is "hitting bottom" in the current quarter, attention will focus on how the monetary policymakers explain their decision and what hints they give about possible future interest rate moves.
If the Fed cuts by 25 basis points as expected, the main focus will be on the statement policymakers issue with the rate change, especially its so-called "tilt" of monetary policy whether the committee thinks the economic risks continue to be weighted towards weakness rather than inflation, or whether they are neutral.
Most economists expect the central bank to retain its policy bias towards easing, but its statement may offer other clues about its assessment of economic prospects. Many investors and economists now believe today's expected easing will be the last in the current cycle a view reflected in financial futures markets. They argue that, given the lags with which monetary policy works, the dramatic easing so far this year will only be felt fully over the next few months.
They predict that the monetary easing, combined with $38 billion in tax rebates being mailed to US homes in the current quarter, should turn the economy around from its sharp slowdown over the last year.
The latest positive sign came yesterday from a prominent gauge of US growth prospects, which continued to signal an eventual recovery.
