Fed tone may send food, gasoline prices higher

A pedestrian passes in front of the Federal Reserve Building in Washington in this January 22, 2008 file photo.

NEW YORK (Reuters) - Consumers battered by soaring energy and food prices may see little relief after the U.S. Federal Reserve cut interest rates on Wednesday and left the door open to further cuts.

The Fed on Wednesday lowered a key U.S. interest rate by a modest quarter percentage point and hinted the move could be the last in an 8-month monetary easing cycle.

But the central bank also suggested more rate cuts could be in store, possibly extending a commodities rally from last summer that sent prices to records as investors shifted money into the asset class to hedge against inflation.

The increases in food and fuel costs have triggered protests around the globe.

"There had been so much hope that they would say something that would give us some sort of indication that they were done with this insanity," said Peter Beutel, president of Cameron Hanover. "Every time they cut rates and leave the door open for another cut they basically are just giving away the store when it comes to commodity prices.

"A lot of these higher prices from the supermarket to the pump are the Fed's handwork," he added.

After the Fed started cutting rates in September, the U.S. dollar plumbed a series of new lows while oil prices have surged 60 percent to near $120 a barrel, propelling U.S. retail gasoline to a record $3.60 a gallon.

Interest rate cuts can boost liquidity in the financial markets, brighten the outlook for economic activity and demand, and weaken the dollar against other currencies which tends to bolster commodity prices.

U.S. gold futures crossed the $1,000-ounce threshold in March, while corn futures hit a new record of 22-3/4 cents a bushel in Chicago this week. Global rice prices are near all-time highs, triggering food riots in Asia.

"To the extent that Federal Reserve rate cuts result in dollar declines, these prices are affected," said Frances Hudson, of Standard Life Investments. "Expectations of future interest rate actions are as important as today's decision."

In its statement, the central bank pointed to the "substantial" reductions already in place and noted rising commodity prices. The Fed also said it still believed inflation would moderate over time, which some analysts saw as suggesting the possibility rates could move lower.

"(The Fed is) indicating that inflation is seen moderating but that they're monitoring it closely. If they see inflation moderating, that could mean this isn't the last cut," said Jim Ritterbusch, president of Ritterbusch & Associates.

The money following commodity-tracking indexes alone ballooned by about $30 billion in the first two months of this year, against $45 billion for the whole of last year, according to an estimate by AIG-Financial Products Corp.

Hedge funds have also flooded into capital markets to trade more energy and commodities futures, accentuating price moves, according to experts.

"There has been a cottage industry of people who used to trade stocks and bonds pouring into commodities," said Beutel.

"These people might have traded 5,000 different stocks and they are trying to push a lot of money into 25 active commodities."

(Additional reporting by Robert Campbell in New York, Jane Merriman, Anna Stablum and Humeyra Pamuk in London)