Fed signals no rush to lower rates again
The Federal Open Market Committee (FOMC) avoided foreshadowing its next move after lowering the benchmark rate on September 18.
By Agencies |
Federal Reserve policy makers signaled they are in no hurry to reduce interest rates again because they aren’t convinced the US economic expansion is coming to an end. The Federal Open Market Committee (FOMC) avoided foreshadowing its next move after lowering the benchmark rate on September 18, minutes of the meeting, published on Tuesday, showed. Officials didn’t want investors to conclude extra cuts were guaranteed, the records said.
Economic reports since then have justified their caution: manufacturing and services industries continued to expand last month, while employment picked up. The Dow Jones Industrial Average has climbed 3% to a record since the meeting. “I don’t think the Fed will move in October, but I certainly don’t think they’ve ruled it out,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. For now, “the economic data have not made much of a case for any additional easing.”
Fed staff economists cut their estimate for fourth-quarter growth, the minutes said, while stopping short of predicting a recession. Three Fed bank presidents on Wednesday and Tuesday said credit market conditions have improved, yet remain fragile. Fed officials next meet October 30-31.
"They can now afford to take their time, and gather more data,” said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Paramus, New Jersey and a former economist at the Fed’s New York branch. "Certainly, the sense of urgency is gone."
The gap in interest rates between 30-year fixed-rate mortgages of $417,000 or less and 30-year “jumbo” loans of more than that amount fell to 78 basis points in the first week of October. That’s down from 98 bps last month, according to Bankrate.com. A year ago, the difference was 31 bps, or 0.31 percentage point.
A Citigroup Global Markets index tracking risk spreads of sovereign bonds and other credit securities has dropped to 0.77 from 0.91 the day before to last month’s Fed meeting. A reading of 1 indicates high risk aversion. “There is not as much of the edginess of concern with the short-term funding markets,” said James Caron, global head of interest-rate strategy at Morgan Stanley in New York. “There is still room for an accident going forward.”
Janet Yellen, president of the San Francisco Fed, said on Tuesday that liquidity constraints “are gradually being resolved," although markets aren’t back to “business as usual.” She made the comments at a speech in Los Angeles. St Louis Fed chief William Poole said in a speech in his bank’s home town that financial markets have stabilised, yet "have not returned to normal and are still fragile."
Economic reports since then have justified their caution: manufacturing and services industries continued to expand last month, while employment picked up. The Dow Jones Industrial Average has climbed 3% to a record since the meeting. “I don’t think the Fed will move in October, but I certainly don’t think they’ve ruled it out,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. For now, “the economic data have not made much of a case for any additional easing.”
Fed staff economists cut their estimate for fourth-quarter growth, the minutes said, while stopping short of predicting a recession. Three Fed bank presidents on Wednesday and Tuesday said credit market conditions have improved, yet remain fragile. Fed officials next meet October 30-31.
"They can now afford to take their time, and gather more data,” said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Paramus, New Jersey and a former economist at the Fed’s New York branch. "Certainly, the sense of urgency is gone."
The gap in interest rates between 30-year fixed-rate mortgages of $417,000 or less and 30-year “jumbo” loans of more than that amount fell to 78 basis points in the first week of October. That’s down from 98 bps last month, according to Bankrate.com. A year ago, the difference was 31 bps, or 0.31 percentage point.
A Citigroup Global Markets index tracking risk spreads of sovereign bonds and other credit securities has dropped to 0.77 from 0.91 the day before to last month’s Fed meeting. A reading of 1 indicates high risk aversion. “There is not as much of the edginess of concern with the short-term funding markets,” said James Caron, global head of interest-rate strategy at Morgan Stanley in New York. “There is still room for an accident going forward.”
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Janet Yellen, president of the San Francisco Fed, said on Tuesday that liquidity constraints “are gradually being resolved," although markets aren’t back to “business as usual.” She made the comments at a speech in Los Angeles. St Louis Fed chief William Poole said in a speech in his bank’s home town that financial markets have stabilised, yet "have not returned to normal and are still fragile."
Boston Fed President Eric Rosengren, in his first speech since taking office in July, said while “investors are not reassessing risk in a wholesale way,” it will likely take “some time” for them to become more confident about assessing some types of securities.
Policy makers all concluded it was best to lower their benchmark rate by half a point to 4.75%, double the amount that most economists forecast, the minutes showed.
Yields on federal funds futures contracts show a 64% probability that Fed officials will leave the benchmark lending rate unchanged at this month’s meeting.
"Further actions would depend on how economic prospects were affected by evolving market developments and by other factors,” according to the records. Any statement on the balance of risks to the economy “could give the mistaken impression that the committee was more certain about the economic outlook than was in fact the case.”
Fed officials continued to express concern about inflation, citing labour costs and a weaker dollar, the minutes showed. The currency fell to a record low of $1.4283 per euro on October 1.
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“Inflation risks could be heightened if the dollar were to continue to depreciate significantly,” the minutes said. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.8% in August from a year earlier, the third straight month within the 1% to 2% comfort range stated by several officials. Policy makers “were a little more confident” that the decline “would be sustained,” the minutes showed. FOMC expressed some scepticism about Labor Department figures that showed the first decline in US payrolls in four years. The August report was later revised to show a gain of 89,000 jobs, from the previous estimate of a 4,000 decline. Employers hired 110,000 in September.
"If no big shoe drops in the meantime, I think they will hold steady” on October 31, said former Dallas Fed president Robert McTeer. “I think if they don’t cut at the next meeting, they are through.”
Housing “remained exceptionally weak,” the minutes said, and “the faster pace of foreclosures as subprime mortgage rates reset was also seen as posing a downside risk” to residential real estate.
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The Fed staff “marked down” their fourth-quarter economic growth forecast, and “trimmed” the 2008 outlook, the minutes said, without providing details. "We do not know how financial markets will evolve, and we do not know how households and businesses will respond to financial developments,” Fed vice-chairman Donald Kohn said in a speech in Philadelphia last week. “We will need to be nimble in the adjusting policy to promote growth and price stability."
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