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Beige Book shows Fed in no rush to cut interest rates

Wednesday, September 5th 2007 - 21:00 UTC
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Fed chairman Ben Bernanke Fed chairman Ben Bernanke

The United States economy is feeling a “limited” impact from the credit re-pricing and weak housing industry, the Federal Reserve said in its Beige Book report Wednesday. The report suggested the Fed may not be in a rush to aggressively cut interest rates despite skittish financial markets.

"Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited" states the Beige Book. The report, seen as key to the outlook of the Federal Open Market Committee (FOMC) policymakers next September 18 meeting, suggested the central bank is not panicking in the wake of financial markets upheaval in response to the sub prime mortgages situation. According to the Beige Book, the regional Federal Reserve banks "reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity." The report underlines that in some areas, "the reduction in credit availability added to uncertainty about when the housing market might turn around". But it also noted that "credit availability and credit quality remained good for most consumer and business borrowers". Skittish financial markets have been looking for clues that the Fed could be soon cutting federal funds interest rate to help keep credit flowing in the face of a retrenchment by lenders in response to the housing maelstrom. Some analysts argue easier credit is needed to avert a recession in the world's biggest economy. But some observers say the Fed may be reluctant to cut rates because it may spark higher inflation and could be seen as bailing out hedge funds and speculators who made risky bets on real estate. The Fed funds rate has been at 5.25% for over a year. However on August 17 it cut the discount rate, (used for loans to the banking system) by half a percentage point to 5.75% with the purpose of pumping liquidity. Some analysts believe the Fed will cut interest rates by 50 points in the coming meetings and begin 2008 with the basic at 4.5 or 4.75%. The Beige Book said reports from the Federal Reserve Districts indicated that economic activity has continued to expand, with different results by region. Some areas reported "moderate" or "modest" growth and a few others slower growth. But the housing industry seems to be worsening across the United States. "The weakness in the housing market deepened across most districts, with sales weak or declining and prices reported to be falling or flat" said the report. However in "nearly every district" modest increases in employment took place during the recent survey period, with wage increases "moderate or steady." This particular edition of the Beige Book will get special attention from the markets, given the general uncertainty, and because Fed chairman Ben Bernanke said last Friday that the Fed would "pay particularly close attention" not just to the most recent economic indicators but to "information gleaned from our business and banking contacts around the country."

Categories: Economy, United States.

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