Washington. -- Will they? Won't they? It's the best guessing game in town.
When the sober-suited officers of the Federal Reserve meet in their elegant conference room here tomorrow and Tuesday, the financial world will be holding its breath.
The central bankers of the most powerful economy will decide whether or not to reduce interest rates again to prime the pump of economic recovery. It is a decision that will reverberate around the globe, affecting markets, altering expectations.
They have economic room to ease the rates. But do they have the need?
It is their judgment call, and a difficult one with the recovery sending so many mixed signals about its strength. The only certainty at the moment is that the recovery will remain weaker than normal, if it doesn't falter.
The U.S. economy has bounced back from previous post-World War II recessions with an energetic 6 percent annual growth in gross domestic product, the total of all goods and services produced in the country. This time it is struggling to reach half that rate.
The Fed has already intervened several times since last autumn. The question remains: has it done enough?
It will take the recommendation of only one of the Fed's 12 regional banks to put a reduction in the discount rate -- the rate charged on loans made by the Reserve Banks -- to a vote of its governors. A majority of those sitting at the table will be needed ++ to act. They meet formally Monday, but could make the decision any time.
Any move to lower the funds rate -- the rate at which banks borrow surplus reserves from each other -- will come from the Federal Open Market Committee, which oversees day-to-day execution of monetary policy. It meets Tuesday.
The funds rate is generally seen as the likeliest mechanism for any new spur to the economy. A quarter percentage reduction of the current 3.75 percent rate could produce up to a half percentage drop in the prime rate, spurring companies and consumers into a more vigorous round of borrowing and spending.
If they engineered a reduction, the Fed officials would also hope it would bring long-term rates down. These are the rates that affect mortgage interest payments, and lowering them is crucial to energizing the housing market, a crucial sector for any robust recovery.
"I think we have a new, improved, quick-acting Fed this year, as apposed to last year," says Roger Brinner, chief economist with DRI McGraw-Hill.
"Last year we had to wait many months [for Fed action] until the economy was deeply in trouble. This year, if we get any piece of bad news now, they will act promptly."
Cynthia Glassman, a former Federal Reserve economist and currently director of research at Furash and Co., a Washington D.C. financial consulting company, said: "There is a balance between wanting to keep inflation down and wanting to promote growth. In the last couple of years they were somewhat more sensitive to inflation concerns.
"Now with several years of recession behind them and relatively low growth forecast, I think they are most sensitive to the growth side of that equation."
It is beyond argument that last year the Fed was slow to recognize recession, tardy in responding, and reluctant to acknowledge the length and breadth of the nation's economic plight.
After cutting the discount rate from 6 percent to 5.5 percent on April 30, the Fed sat on its hands for five months while nascent recovery turned into double-dip downturn, workers lost their jobs and consumer confidence plummeted.
Not until September 13 did the Fed ease the rate further from 5.5 percent to 5.0 percent. The result: virtually zilch. Another pause until November 6 when it took another half percentage point off. Again, no good.
Then, just before Christmas, on December 20 it delivered a full point reduction to 3.5 percent, and things started to happen. The first real signs of recovery began to emerge. In the first quarter the economy, as measured by gross domestic product, grew at an annual rate of 2 percent, not great by historical recovery standards, but positive movement.
Retail sales shot up almost 5 percent in January and February as consumers went on a post-Christmas spending spree in unseasonably warm weather. It was a brief boom. The spending money soon ran out, leaving March retail sales down 1 percent, and April's just reviving by 0.9 percent.
The recovery is generally seen as likely to sputter on, gradually gaining some strength until it reaches a growth rate of 3 percent or 3.5 percent in the last two quarters of this year.
The Fed, disturbed by the lack of vitality in the recovery, moved in April to reduce the federal funds rate to its present level of around 3.75 percent, well below its 1991 average of 5.69 percent and the 1990 average level of 8.10 percent.
Complicating the Fed's response has been the fact that the recent recession was no ordinary one, and the recovery that is following it is proving equally unusual. Fed chairman Alan Greenspan has spoken of "extraordinary forces at work in the economy that add an exceptional measure of uncertainty to the current picture."
The 1991 recession, for the first time, hit white collar workers as much as blue-collar workers. It was centered on the nation's coasts rather than in the industrial heartland. It was wider than it was deep. It crept up on us, and it is only crawling away.
There are a slew of reasons for the sluggishness: economic growth is not strong enough to make major inroads into unemployment, which is expected to be still around the 7 percent mark at year's end; many of the jobs that have been lost will not be replaced as companies pursue sleeker profiles; consumers, their confidence shaken, remain leery of taking on new debt after struggling to reduce old; even demographics are working against any new boom-time as a post-Baby Boom population reduces overall demand for new houses and cars.
All these factors will be on the minds of the Fed officers this week as they weigh whether to intervene again.
One other issue they keep in mind constantly: inflation. When the Fed made its one percentage point reduction in the discount rate in December, it was "on the basis of accumulated evidence, notably monetary and credit conditions as well as current economic conditions that point to a receding of inflationary pressures."
Inflation is important because it impacts on long-term interest rates and inhibits economic expansion. If inflation appears likely to increase over the long term, the interest rates go up to compensate. Mortgage rates follow. One of the frustrations of this recovery has been the reluctance of long-term interest rates to track short-term rates downward, reflecting the market's continuing concern about inflation.
Currently, inflation is cowed but not beaten. The Consumer Price Index rose only 0.2 percent in April. Without volatile food and energy prices, the "core" rate was 0.3 percent, suggesting around 3.5 percent inflation for the year.
This is low enough to give the Fed the room to act without worrying abut reigniting inflation. Mr. Greenspan was chastised by members of Congress for his slow reactions last year, and this year he has repeatedly said he stands ready to intervene should there be any danger of another setback to recovery.
Even while expressing cautious optimism about economic prospects, he assured members of the Joint Economic Committee, chaired by Maryland Democrat Sen. Paul S. Sarbanes, in March: "We will remain sensitive to signs that the anticipated pickup in business activity is not emerging."
But not everyone is confident in his judgment. Philip Braverman, chief economist of DKB Securities Corp., New York, said: "They have an enviable record in consistency -- in being wrong.
"They didn't see the recession coming. They didn't see the credit crunch coming. It arrived, and they argued it wasn't here.
"When it was inescapable, irrefutable, they said 'Yes, it has arrived, but it will be brief, and it's nothing to worry about. It is entirely due to the gulf war.' The gulf war ended. They said 'The gulf war is over, and we are delighted.' They recession didn't end. They said "Well, it's a mystery, and it soon will end.' And they have been saying that consistently.
"They have had their blinkers on all the way from Day One. I see perfect consistency."
The Fed has always had its critics. Usually, they accuse it of being politically motivated, of cutting interest rates to boost the political chances of a president as much as to the economy. If it cuts rates again in election year, it risks political rebuke. If it doesn't, it risks economic rebuke. It's in a tough spot.