Fed To Meet On Tuesday

Monday, August 6th 2007, 2:33 pm

By: News On 6

WASHINGTON (AP) _ Fears gripping Wall Street in recent weeks _ a worsening housing slump and a painful credit crunch _ are likely to figure prominently in discussions among Federal Reserve policymakers this week.

Fed Chairman Ben Bernanke and his central bank colleagues are to meet Tuesday to assess economic conditions. Concerns have grown especially among investors since the Fed's last gathering in late June that problems in both the troubled housing and mortgage markets are spreading. And that could pose a risk to the broader financial system and the national economy.

``The Fed's list of worries got longer,'' said Brian Bethune, economist at Global Insight. ``We are seeing a continued unwinding of the housing sector and we're getting tighter lending conditions. I think that is going to provoke a lot of discussion about what is happening in the mortgage markets and the overall availability of credit,'' he added.

The free flow of credit is important to smooth functioning of the national economy. Increasingly restrictive lending conditions can put a damper on peoples' ability to buy big-ticket items such as homes, cars and appliances. And it can crimp businesses' capital investment and hiring. That reduced appetite by businesses and consumers would slow overall economic activity.

Dissecting the current situation that has led to turbulence on Wall Street in recent weeks and charting out possible scenarios for the economy is something Bernanke and his colleagues will be focusing on during their closed-door deliberations Tuesday, analysts said.

Economists believe Fed policymakers _ in the brief statement released after the meeting _ will acknowledge the difficulties associated with housing and tightening credit and will seek to strike a reassuring tone that the resilient economy will work its way safely through those challenges.

It's a delicate dance. The Fed wants to send a comforting message that it is on top of things but at the same time it doesn't want to be viewed as being overly optimistic or pessimistic.

Against this backdrop, the Fed is widely expected to leave an important interest rate at 5.25 percent on Tuesday. In turn, commercial banks' prime interest rate for certain credit cards, home equity lines of credit and other loans _ would stay at 8.25 percent.

The central bank's key rate hasn't budged for more than a year. Before that, the Fed raised rates for two years to fend off inflation.

The Fed is expected on Tuesday to repeat its concern that a big risk to the economy is if inflation doesn't recede as policymakers currently anticipate.

Core inflation _ excluding food and energy prices _ has moderated. These prices rose 1.9 percent over the 12 months ending in June, down from a 2 percent annual gain for May. Fed policymakers, however, say they want to see a string of steady improvements before they are willing to downgrade the risk of inflation.

After nearly stalling in the first quarter of this year, economic growth rebounded in the April-to-June period at a brisk 3.4 percent pace. That bounceback came despite a drag on economic activity from the sour housing market and a much smaller appetite by consumers to spend. Growth in the July-to-September quarter probably will slow to around a 2.5 percent pace, analysts said.

Many economists still believe the Fed will hold interest rates steady through much, if not all, of this year. Investors, however, are again upping the odds of a rate cut.

``Market circumstances over the past month will certainly challenge the stability of monetary policy,'' said Carl Tannenbaum, chief economist at LaSalle Bank. ``On the one hand, economic fundamentals are not at all bad,'' he said ``On the other hand, in recent weeks it appears segments of the financial industry have become paralyzed. The resulting restriction in the flow of credit through the economy represents a significant risk to the expansion.''