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Look for more interest rate cuts by the Federal Reserve following its latest move to slice a quarter percentage point each from the benchmark federal funds rate and the discount rate, which now stand at 4.25% and 4.75%, respectively.
The Fed's statement after these cuts shows that officials are worrying about "deterioration in financial markets" and its impact on the economic outlook. We expect the central bank to pull the easing lever again during the winter -- two more times in total over the next several months.
The Fed says without reservation now that "economic growth is slowing" because the housing correction has become uglier and both business and consumer spending are losing some steam. The latter observation suggests that the Fed sees housing's problems weighing on the broader economy, a trend that the central bank would surely like to roll back.
At the time of their previous rate reduction on Oct. 31, central bank officials signaled a coming policy pause, under the assumption that the economy appeared able to weather the storm in the credit and housing markets. But since then, the market turmoil has whipped up into a pretty threatening cyclone. The Fed's return to rate cuts is an attempt to restore confidence in lending and borrowing to prevent the economy from sliding into a recession as well as to keep consumers in good spirits.
The Fed's reduction in the federal funds rate, which banks charge each other for overnight loans, will help by prompting banks to reduce rates on key types of credit. Notably, banks' prime rates will fall to 7.25%. The cut in the discount rate -- tapped by banks for backup funding in times of money market stress -- is aimed at encouraging banks to keep the liquidity flowing to needy corporate borrowers.
However, it remains to be seen whether the Fed's actions will have much effect on the bruised mortgage market. Conditions in the mortgage world won't improve much until the ongoing drop in average house prices runs its course. We don't see any light at the end of that tunnel until 2009.
For now, economic figures are still sending mixed signals. On the positive side, job growth -- at least through November -- is respectable if not buoyant, exports continue to surge and the holiday shopping season is off to a decent start. But housing and manufacturing activity continue to weaken, and the fallout from the subprime mortgage mess on credit markets is threatening to dry up capital that normally would be used by companies and households to keep the economy's gears humming. There's a palpable risk that business investment will be crippled as a result.
Meanwhile, inflation risks aren't gone. A weak dollar results in higher prices for imports, energy prices remain high, and productivity growth is slowing. But the Fed is looking at an economy that, measured by gross domestic product, will likely be expanding by less than 1% this quarter and the first quarter of 2008. Addressing rising costs can wait until the economy is in less peril. As former Fed governor Lyle Gramley says, "The Fed can quickly take the stimulus back and raise rates."
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POSTED BY: madmilker (December 30, 2007 09:12 AM)
The American consumer had a negative savings four months in a row back in 2005 and the government said...all is well! You people got to understand there ain't no money in US banks. Dang! the private bank (FED) could drop it to "0%" but with the consumer spending 1.5% more each month than they make and no money in a bank ...just who is gonna borrow the money besides the US government. We been in a recession since 2005 but the USA has been broke since 1996 when everyone got addicted to cheap stuff.
What I type hardly ever gets in print cause most that are on this "The Kiplinger" wouldn't know what real work is if it hit them between the eyes with a baseball bat.
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