Investors expect to see Fed cut rates

WASHINGTON -- The Federal Reserve, with consumer spending and housing figures sending conflicting signals, is likely to reduce interest rates today while leaving itself leeway either to take back the move or cut more.

Since the Fed met Sept. 18, new reports have shown higher retail sales, record exports and a further slump in home-buying. Chairman Ben S. Bernanke and his colleagues, who this month have repeatedly stressed "uncertainty" in the economic outlook, will probably cite risks of both slower growth and higher inflation in today's statement, Fed watchers said.

"They've got to leave it open on both sides and see how the economy moves along," said Thomas Garcia, head of trading in Santa Fe, N.M., at Thornburg Investment Management, which oversees $50 billion. "Regardless of whether they do cut rates, they definitely have to have language that says, 'If we start to see inflation pick up, we can still raise rates.' "

Ninety-one of the 108 economists surveyed by Bloomberg News forecast a quarter-point reduction in the target rate for overnight loans between banks to 4.5 percent. Fourteen predict no change and three expect a half-point reduction.

The Federal Open Market Committee resumes meeting today after starting discussions Tuesday and is scheduled to announce its decision in the afternoon.

Policy makers have refrained from steering investors on today's decision. Vice Chairman Donald Kohn said twice this month that policy makers "need to be nimble," given the growth and inflation risks.

Some investors are counting on lower rates and a disappointment today may roil stocks, increasing the chances the six-year expansion will end. Traders see a 92 percent chance of a quarter -point move today, according to futures quoted on the Chicago Board of Trade.

At the same time, cheaper borrowing costs may stoke consumer prices, which are being pressured by a weakening dollar and record oil prices. After the Fed's half-point reduction Sept. 18, commodities prices jumped and yields on Treasury notes linked to inflation increased.

The Fed's preferred inflation measure rose 1.8 percent in August from a year before, near the top of the 1 percent to 2 percent "comfort" range Bernanke said he favored before taking the central bank's helm.

The committee will probably repeat language from last month's statement that "some inflation risks remain, and it will continue to monitor inflation developments carefully," economists said.