Fed's Rate Cut Could Be Last For a While
Number of posts : 440
Registration date : 2007-07-01
|Subject: Fed's Rate Cut Could Be Last For a While Wed Oct 31, 2007 10:28 pm|| |
Fed's Rate Cut
Could Be Last
For a While
By [b]GREG IP
October 31, 2007 8:14 p.m.
The Federal Reserve cut interest rates by a quarter point, but with an eye on surging energy prices and other inflationary threats, it strongly discouraged expectations of further cuts.REAL TIME ECONOMICS
Economists React: Fed's 'Independence Day'
How the Fed's statement changed
The Lone Dissenter: Hoenig
[url=/article/SB119385539973677910.html?mod=Economy]Text of the Fed's Oct. 31 statement[/url]
Vote: Did the Fed Make the Right Move?
Federal Reserve Monitor: View historical data
[url=/article/SB119383320102877592.html?mod=Economy]GDP Rises 3.9%, but Slowdown Is Foreseen[/url]
[url=/article/SB119381901413577481.html?mod=Economy]Crude Oil Jumps 4.6% to Record of $94.53[/url]
The decision, following a half-point cut six weeks ago, shows Fed Chairman Ben Bernanke is grappling with risks on two fronts: Plunging home construction and eroding real-estate values could hit the broader economy, while rising oil and commodity prices, combined with a falling dollar, could spoil the Fed's hopes to contain inflation.
Developments yesterday underlined the tension. Though data showed the U.S. economy growing at a faster-than-expected 3.9% annual rate in the third quarter, a purchasing managers' survey showed weak manufacturing in the Midwest in October, the latest in a series of such reports. At the same time, crude-oil futures prices jumped $4.15 to $94.53 a barrel, a nominal record, and gold futures settled at $792.00 an ounce, a 27-year high.
Stocks initially fell after the announcement dashed expectations of more rate cuts, but then recovered, with the Dow Jones Industrial Average climbing 137.54 points, or 1%, to 13930.01, less than 235 points from its record.Stuart G. Hoffman, chief economist at PNC Financial Services, discusses today's rate cut by the Federal Reserve and comments about inflationary risk and economic growth.
The Fed cut its target for the federal-funds rate, charged on overnight loans between banks, to 4.5% from 4.75%, after cutting it half a point in September. The combined cuts were designed, it said in the accompanying statement, to "help forestall some of the adverse effects on the broader economy" from the summer credit crunch that drove up interest rates paid by many homeowners, corporations and banks.
Growth was solid in the third quarter but likely to slow with the "intensification of the housing correction," the Fed said in its statement. Core inflation, which excludes food and energy, has improved, it said, "but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation."
As a result, the Fed said, "after this [rate cut], the upside risks to inflation roughly balance the downside risks to growth."
In the weeks leading up to the meeting, Fed officials saw their choice as no cut or a quarter-point ease. But their room to maneuver was limited by the fact that markets had become certain there would be a cut and, by last week, perhaps even a larger, half-point cut. Many on Wall Street justified their predictions on the grounds that Fed officials hadn't publicly countered them.
Fed officials don't like to do something just because the markets expect it. But with futures markets assigning a 92% probability yesterday morning to a cut, a failure to deliver would have been the biggest surprise in the 14 years for which comparable data is available, according to Bianco Research LLC, a Chicago financial-research firm. That would likely have led to sharp declines in stock prices and a possible resurgence of risk aversion in debt markets. Many predicted that would have led to a stock selloff and increased reluctance to lend.
Alan Blinder, a former Fed vice chairman who teaches at Princeton University, says the Fed didn't have an obvious case to cut and shouldn't have allowed the market to develop expectations that it would. "The Fed did not make their views very clear to the markets for about a three-week period in October when they could have," he said. "As result, they wound up being pushed by the market. The Fed has a communications problem when the market's thinking diverges from the Fed's and the Fed doesn't say anything to get [the two] back in line."
Some details suggest that, for the Fed as a whole, the decision to cut may have been relatively close. The vote on the Federal Open Market Committee to cut was 9 to 1. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented, voting for no cut -- the first time this year a vote hasn't been unanimous. Moreover, just six of the 12 reserve banks requested the parallel decrease in the discount rate, charged on direct Fed loans to banks, to 5% from 5.25%. That suggests that the presidents of some of the other banks also would have preferred no cut. Just five of the 12 bank presidents have a vote on the FOMC in any given year.
Perhaps mirroring the differing views inside the Fed, outsiders criticized the decision from both sides. Some said the Fed is underestimating the risks posed by the housing bust and credit crunch and will have to ease monetary policy again before long. "The bursting of the housing bubble and strains in parts of the credit markets are profoundly deflationary events, and the Fed's concerns seem out of place," Bank Credit Analyst, a financial research service, said.
But others accuse the central bank of giving in to Wall Street's cries for relief at the expense of stoking inflation. "It's far beyond time to risk a little economic growth in the name of containing inflation, as anyone who eats food or buys gasoline can attest," Chip Hanlon, president of Delta Global Advisors Inc., wrote.DESKTOP NEWS ALERTS
Get alerts for breaking news -- such as Fed moves, major world events and big mergers -- delivered straight to your desktop. Alerts will appear in a small window on your screen, much like an instant-messaging window. See a sample and get more information.
The Fed's attention to the inflation risk of commodity and oil prices and "other factors" -- which probably include the lower dollar -- surprised outsiders, but gratified those who have been worried about just that for months now. "The Fed has to walk the walk as well as talk the talk," said John Ryding, an economist at Bear Stearns. "They have to, should the numbers demand it, be willing to reverse the rate cuts. With gold up sharply and the dollar down, the market is still questioning the Fed's commitment to do what it says." The expected inflation rate as implied by trading in inflation-protected Treasury bonds also rose yesterday, though that may reflect short-term trading dynamics.
Despite the rhetoric, the Fed's leadership probably isn't too worried about inflation. Officials believe the tendency of a lower dollar or higher energy prices to become embedded in underlying inflation has declined significantly in recent decades. Their principal source of inflation concern -- the low level of spare capacity in the economy -- has waned as the unemployment rate rises and the economy slows. Wage and benefit costs rose at a subdued rate in the third quarter, the Labor Department said yesterday. The economy is expected to slow sharply in the fourth quarter as high energy prices bite into consumer spending and housing construction tumbles further.
On the other hand, the Fed doesn't see the self-reinforcing dynamics that lead to recession, such as in 2001, when it had to cut rates repeatedly. Rather, it sees the economy as sagging temporarily, as the pool of potential homeowners shrinks to match the tightened terms of credit and the inventory of unsold new homes is worked down, after which it expects growth will return to a normal rate.
Write to Greg Ip at email@example.com
Number of posts : 440
Registration date : 2007-07-01
|Subject: Re: Fed's Rate Cut Could Be Last For a While Wed Oct 31, 2007 10:34 pm|| |
GDP Rises 3.9%, but Slowdown Is Foreseen
By [b]KELLY EVANS
November 1, 2007
The U.S. economy weathered the summer credit crunch surprisingly well as strong export performance offset the drag from housing, but it will be hard-pressed to repeat that growth in coming months.REAL TIME ECONOMICS
Read the latest news and analysis on the economy at WSJ.com's Real Time Economics blog.
Gross domestic product, the value of goods and services produced in the country, expanded by a seasonally adjusted 3.9% annual rate in the third quarter, the Commerce Department said. That topped most forecasts and bested second-quarter growth of 3.8% and first-quarter growth of 0.6%.
The crumbling housing sector spurred a 20.1% drop in residential investment, which shaved a full point off GDP growth. That was more than offset by a 3% rise in consumer spending, which contributed two points to GDP growth, and by international trade, which added another point as exports surged faster than imports. The report showed few signs the housing bust was spilling into the rest of the economy, at least in the third quarter.
Economists were quick to note that the U.S. economy was beginning to show signs of weakness in September. Among worrisome details in the third-quarter report was rising inventories, which led some forecasters to predict a cutback in production in the current quarter. Morgan Stanley economists, for instance, cited this as a reason for cutting their fourth-quarter prediction of GDP growth to 1.1%.
Many economists expect growth to slow through the end of this year and into next year as the fallout from a deteriorating housing market, higher oil prices and credit-market woes continue. Consumer confidence in October sank as a result of housing woes and escalating food and fuel prices. Unemployment claims have edged higher, and many retailers have cautioned that holiday sales may be below target.
The latest survey of Chicago regional manufacturing activity dropped to an eight-month low, prompting some economists to question how long foreign demand for exports can prop up the U.S. economy.
Still, many forecasters expect the U.S. to dodge a recession.
"I think that this is a very resilient economy," said Peter Kretzmer, senior economist at Bank of America, "[one] that's likely to ride out what is a very significant disturbance in the housing market."
The latest employment report from payroll company [url=/quotes/main.html?type=djn&symbol=adp]Automatic Data Processing[/url] Inc. suggests that the government's monthly jobs report will show an increase of some 125,000 jobs in October, a gain over previous months.
Inflation appears to be contained, with the price index for consumer expenditures rising 1.7% after a 4.3% increase in the second quarter. Core prices rose 1.8%. Additionally, employment costs for wages and benefits decelerated during the quarter.
In remarks following the GDP report, Edward Lazear, chairman of President Bush's Council of Economic Advisers, noted, "It is really quite remarkable that during a quarter when we had housing-market issues, when we had a credit situation in the beginning of August, despite that, we still ended up with nearly 4% growth."
Yet the risks to growth in the current and coming months were palpable enough to prompt the Federal Reserve to cut interest rates yesterday by a quarter of a percentage point, to 4.5%.
"Economic growth was solid in the third quarter," the Fed wrote in a release accompanying the decision. "However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction."
Write to Kelly Evans at firstname.lastname@example.org