Are U.S. rate cuts near an End?

Are U.S. rate cuts near an end?
RTGAM

Here's Allan Robinson's At The Bell which you'll find in tomorrow's newspaper:

The U.S. economy is just crawling along, but investors are betting that the U.S. Federal Reserve Board is almost finished its work, at least so far as lowering short-term interest rates go.The consensus opinion is that the Fed will lower the federal funds rate by one-quarter of a percentage point today to 2 per cent, but what investors will be looking for are hints."Growth appears to have ground to a halt with consumers tapped out, businesses on a recession-watch, and home builders still hacking away at output to pare bloated inventories," said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.Nevertheless, it looks like the Fed may signal a pause in its rate-cutting strategy, Mr. Guatieri said.

"There's a sense if you keep cutting rates you get less and less of a bang for the buck," he said. The Fed has reduced the cost of borrowing and helped to deal with the availability of credit, he said. The federal funds rate has been lowered three percentage points since September.WHAT TO KEEP AN EYE ONThere is a lot of stimulus that has been injected into the system and concern is growing about the impact of the weak U.S. dollar on inflation, Mr. Guatieri said.

The first-quarter gross domestic product data, which is also scheduled for release today, is forecast to have increased at an annual rate of 0.5 per cent, compared with 0.6 per cent during the fourth quarter, according to a survey of economists by Bloomberg.Rising price pressures are also expected to be evident today with the GDP price index increasing to an annual rate of 3 per cent during the first quarter, up from 2.4 per cent during the fourth quarter of 2007 and only 1 per cent in the third quarter.HOW WILL THE MARKET REACT?All in all, that leaves investors in the somewhat precarious position of waiting for the economic turnaround.And indications that the Fed might be ending its rate-cutting strategy have already led to a stronger U.S. dollar.

The problem facing investors is that energy and materials, which account for about 50 per cent of the S+P/TSX, would be exposed to weaker commodity prices resulting from the stronger dollar. "A change in equilibrium of resource prices will have a large effect on the [index] performance," wrote Clement Gignac and Pierre Lapointe, strategists with National Bank Financial Inc.Copyright 2001 The Globe and Mail