The Wall Street Journal leads page one with a report that the Federal Reserve is considering a halt in its campaign of aggressive rate cuts. While the Fed is likely to trim rates by a quarter-point at its meetings next week, the Journal says it might just hold the line, something the markets are likely to dislike.

The shifting sentiment doesn’t mean the Fed thinks the worst is past for the economy. It is almost certain to signal continued concern about economic growth and a willingness to cut rates further if the outlook worsens.

Still, officials would like to see whether their rate cuts, the Fed’s other steps to lubricate credit markets and imminent tax rebates help produce a second-half recovery.

While the Journal notes that for the first time in months the Fed is meeting while the economy doesn’t appear in danger of falling off the cliff any minute now, some things have worsened since it met last month to slash rates by three-quarters of a point. Employment fell faster than expected, retail sales continue to be soft, and food and energy costs continue to skyrocket. It quotes an analyst saying the last $10 of increase in the price of oil will shave half a point off economic growth.

Still, stocks are up 7 percent and the WSJ says some consumer loan rates are beginning to fall, signaling something of a thaw in credit markets since the Fed backstopped Wall Street by opening lending to it and accepting its junk debt securities as collateral. The Financial Times says concern about a wave of big-bank failures are way down since the Fed’s move five weeks ago.

But the all-important Libor rate, which measures how much banks charge to lend to one another, has spiked in recent days. Bloomberg says some gauges show Libor, already at a seven-week high, still has room to rise on “speculation the global credit crunch prompted lenders to manipulate the rate to prevent their borrowing costs from escalating.” In other words, lying about their loan rates to make things seem better than they really are.

Street shoots self in foot

The Journal has an interesting story on C2 that says so-called revolvers may be the next weapon to backfire on the financial industry.

The paper says companies are beginning to increase their borrowing from revolving lines of credit, which are sort of like corporate credit cards, and that these new loans could be riskier than the leveraged-buyout debt that’s caused so many headaches on Wall Street.

The banks that issued these revolvers to companies can’t just back out of them willy-nilly. In some cases they’re on the hook for seven years at rates the WSJ quotes an analyst saying are “really cheap,” though it doesn’t say how cheap.

It’s usually a bad sign when a company taps its revolver for a large sum since these are typically meant for day-to-day cash-flow management, not to shore up a firm’s longer-term finances.

Rice quotas at Costco

The WSJ, the Los Angeles Times, and The Associated Press all take looks at how the rice crisis is hitting the U.S.: Sam’s Club and Costco are slapping restrictions on how many bags a customer can buy. No word yet on if customers are rioting in aisle four.

The WSJ says on B1 that hoarding is the cause, and it’s driven as much by skyrocketing prices as by fears that rice will run out (some other stores have limited purchases of such staples as flour and oil). The LAT says there is no U.S. shortage—the country exports half of what it produces:

“It is like a run on the bank. We don’t think there is a shortage, it is just increased shopping by customers who think there is,” said Richard Galanti, Costco’s chief financial officer.
The AP says the food runs have been caused by business customers like restaurant owners, and regular grocery stores aren’t seeing the panic.

Meant for each other

It appears Delta and Northwest are collapsing into each other’s arms. The two airlines, which recently agreed to merge, reported big first-quarter losses totaling about $10 billion, though most of that was for non-cash charges to write down goodwill lost over the last year by soaring oil prices. The Journal says on its Marketplace front that before these special items, the losses were a combined $465 million.

Jet fuel prices rose 63 percent from a year ago, says Bloomberg, pulling all the major airlines into the red. The New York Times says on C2 that the airlines need to hang significant price hikes on consumers to return to profitability.

Apple good, coffee bad

In earnings news, Apple continued the wave of good technology reports, with sales up 43 percent and profits up 36 percent on strong sales of its Mac computer line, though iPod sales were flat.

But Starbucks was “scalded,” as the Journal says on B3, by slower sales in the first quarter and says it expects to report lower profits. Same-store sales were down in the “mid-single digits,” it said, hurt by the housing busts in California and Florida, which combined account for nearly a third of its sales.

The LAT takes a look at the state of coffee drinkers’ habits and finds people are detoxing.

Skimping on sauce won’t pack ’em in

It’s a bad time for restaurants generally, which the WSJ on page one says is in its “worst slump in decades” with “almost all segments struggling.”

Many chains have scaled back expansion plans or cut costs by skimping on things like extra sauce and free sour cream. Some are shuttering sites and laying off workers. Private-equity firms, which plunged into the business earlier this decade using gobs of borrowed money, are now especially vulnerable as those debts come due.

We say good riddance to the sour cream, but extra sauce? Slow down!

The Journal says eating in has big repercussions for the economy since restaurants are the third biggest employer in the country and kindly notes that “Many of those jobs are held by the poor and immigrants who have few other options for work.”

Village Inn, a diner chain where we many nights of our youth were misspent, is shaving an ounce off its hash brown servings and studying the implications of reducing the number of sugar packets it puts out on the tables.

The WSJ says analysts don’t expect things to turn around soon: there’s a glut of restaurants, with 45 percent more open now than in 1990.

Bond insurers bomb

It’s been a while since we heard from the bond insurers, and true to form, they’re back in the papers with bad news. Ambac Financial lost $1.7 billion in the first quarter, about eight times the loss analysts had expected, the WSJ says on its Money & Investing front. Its shares plunged 43 percent to their lowest level yet, and rival MBIA’s were down a third.

That sparked our “Financial Recovery? Not Just Yet” Quote of the Day from Bloomberg:

“Just when you thought things are getting back to normal, there are these horrible numbers,” said Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York. “If trends like this continue, they are going to have to go back to the markets very soon” (to raise capital).

But Bloomberg quotes an analyst saying the company may not be able to raise more capital, meaning a downgrade by the credit-rating firms will be “unavoidable.”

The papers say the losses raise concerns yet again about whether it will be able to keep its AAA credit rating, which is crucial to its business and to the prices of the $1 trillion in debt it has insured. If the firms are downgraded, it would spark a wave of forced selling that would hammer financial markets.
The FT says Ambac warned that its subprime losses may reach $3 billion, though it doesn’t say if that’s for future losses or includes past ones.

The Times slaps a Reuters story on C3 that reports Ambac saying it’s “writing very little new business” now.

Safety in numbers

The Journal says on C1 that Wall Street is trying to organize to self-regulate the exponentially growing market for credit-default swaps—contracts bought to insure bonds or other debt against the possibility that a company won’t be able to pay it off.

Any steps to shore up this $45 trillion market and to make it more transparent are, to say the least, welcome.

Best practices

The Times reports on C1 that a former Bristol-Meyers Squibb executive has been indicted on federal charges that he negotiated a secret deal to keep a competitor from producing a generic version of Bristol-Meyers’s best-selling drug Plavix—and then kept it from regulators.

The company pleaded guilty to related charges last year and paid a million-dollar fine.

Hey, I could buy a home now!

The WSJ notes in its quarterly house-price report on D1 something that we haven’t seen enough reporting on: falling house prices are good—for people who want to buy a house, especially for those who couldn’t afford to buy one because everyone else was in a home-buying orgy that sent prices into orbit.

During the boom, home prices rose far faster than incomes. Home prices as measured by the S&P/Case-Shiller national index shot up 74% in the six years through 2006, while median household income rose 15%. (Neither figure is adjusted for inflation.) Now prices in many areas are adjusting back toward more affordable levels, a process that could take several years.

Here’s a good chart.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.