(an interoffice email)Ãƒâ€šÃ‚Â
Thanks, and good call!
> Many I spoke to post-fomc talked about an intermeeting ease on the discount
> Also, that the Fed would use their mouthpieces (Ip,e.g.) to get a message
> out tomorrow if today’s reaction went poorly.
> So here we have it, Ip story tonight on potential discount rate cut within
Fed Cuts Rates, Seeks New Ways To Thaw Credit
By GREG IP
December 12, 2007
WASHINGTON — With a deepening credit crunch threatening to drag the stalledÃƒâ€šÃ‚Â U.S. economy into recession, the Federal Reserve cut interest rates for theÃƒâ€šÃ‚Â third time since August, and left the door open to further cuts.
But yesterday’s cut, at the low end of Wall Street’s hopes, disappointedÃƒâ€šÃ‚Â investors, who hoped the Fed would do more to thaw frozen credit markets.Ãƒâ€šÃ‚Â The Dow Jones Industrial Average fell sharply, undoing about a third of theÃƒâ€šÃ‚Â run-up in stocks triggered in late November when top Fed officials firstÃƒâ€šÃ‚Â publicly signaled that another rate cut was likely. The blue-chip averageÃƒâ€šÃ‚Â ended the day at 13432.77, down 294.26 points, or 2.1%.
The Fed lowered its target for the federal-funds rate, charged on overnightÃƒâ€šÃ‚Â loans between banks, by a quarter percentage point to 4.25%. It also cut theÃƒâ€šÃ‚Â discount rate, at which it lends directly to banks, by the same amount, toÃƒâ€šÃ‚Â 4.75%.
Fed officials, however, continue to consider ways of using various tools –Ãƒâ€šÃ‚Â including the discount rate — to combat banks’ unwillingness to lend evenÃƒâ€šÃ‚Â to each other, which they view as a threat to economic growth. The centralÃƒâ€šÃ‚Â bank could take action within days.
A variety of steps, widely discussed in the markets, are likely to be on theÃƒâ€šÃ‚Â table, including another cut in the discount rate, longer-term loans toÃƒâ€šÃ‚Â money-market dealers, easier collateral rules for loans from the Fed, andÃƒâ€šÃ‚Â other complex steps last taken in 1999 to alleviate funding pressures aheadÃƒâ€šÃ‚Â of the year 2000, when many feared a “Y2K” computer bug would disruptÃƒâ€šÃ‚Â markets and create economic havoc.
Changes in the discount rate can be made by the Fed board in WashingtonÃƒâ€šÃ‚Â without the approval of the entire 17-member policy-making Federal OpenÃƒâ€šÃ‚Â Market Committee, which sets the federal-funds rate target.
Some on Wall Street yesterday criticized the Fed’s actions so far asÃƒâ€šÃ‚Â inadequate. “From talking to clients and traders, there is in their view noÃƒâ€šÃ‚Â question the Fed has fallen way behind the curve,” said David Greenlaw,Ãƒâ€šÃ‚Â economist at Morgan Stanley. “There’s a growing sense the Fed doesn’t getÃƒâ€šÃ‚Â it,”
Markets expect a weakening economy will force the Fed to cut rates more, Mr.Ãƒâ€šÃ‚Â Greenlaw said. Futures markets expect another cut in January and aÃƒâ€šÃ‚Â federal-funds rate of 3.25% by next fall.
In its statement yesterday, the Fed said that its quarter-point rate cut,Ãƒâ€šÃ‚Â which pushed the federal-funds rate a full percentage point below where itÃƒâ€šÃ‚Â stood in early August, “should help promote moderate growth over time.”
The central bank didn’t, as it did in October, say the risks of weakerÃƒâ€šÃ‚Â growth and of higher inflation were roughly balanced. That message was aÃƒâ€šÃ‚Â signal that the Fed didn’t expect to cut rates again.
Instead, the Fed said yesterday it will to “continue to assess the effectsÃƒâ€šÃ‚Â of financial and other developments on economic prospects and will act asÃƒâ€šÃ‚Â needed.” By avoiding any explicit indication of its next move on rates, theÃƒâ€šÃ‚Â Fed left its options open for its next meeting in late January.
The FOMC’s 10 voting members approved the rate cut 9-1. Federal Reserve BankÃƒâ€šÃ‚Â of Boston President Eric Rosengren dissented in favor of a sharper,Ãƒâ€šÃ‚Â half-point cut. One FOMC member also dissented in October, but in favor ofÃƒâ€šÃ‚Â no rate cut. The shift in the dissents, from wanting less rate cutting toÃƒâ€šÃ‚Â wanting more, symbolizes the swing toward pessimism at the Fed.
“Economic growth is slowing, reflecting the intensification of the housingÃƒâ€šÃ‚Â correction and some softening in business and consumer spending,” the FedÃƒâ€šÃ‚Â said yesterday. “Moreover, strains in financial markets have increased inÃƒâ€šÃ‚Â recent weeks.”
Unlike the previous two rate cuts, yesterday’s wasn’t portrayed asÃƒâ€šÃ‚Â “insurance” against improbable but damaging economic scenarios. ThatÃƒâ€šÃ‚Â suggests Fed officials view the economy as weaker than they expected asÃƒâ€šÃ‚Â recently as late October.
Corporate executives are also signaling a more downbeat outlook. “I’m notÃƒâ€šÃ‚Â going to put a happy face on this. Consumers are going to be a challenge inÃƒâ€šÃ‚Â 2008,” General Electric Co. Chief Executive Jeffrey Immelt told investorsÃƒâ€šÃ‚Â yesterday. But global growth is “as strong as ever,” he added.
When Fed policy makers met in late October, financial markets were in betterÃƒâ€šÃ‚Â shape than they had been in August, and the economy had just posted a strongÃƒâ€šÃ‚Â third-quarter performance. They chose to cut rates by a quarter point andÃƒâ€šÃ‚Â concluded that would likely be enough.
But in subsequent weeks, markets reversed course as big losses tied toÃƒâ€šÃ‚Â soured mortgage-related investments cut into the capital of major banks andÃƒâ€šÃ‚Â other financial institutions, limiting their ability to lend. Fed ChairmanÃƒâ€šÃ‚Â Ben Bernanke and Vice Chairman Donald Kohn signaled their increased concernÃƒâ€šÃ‚Â in speeches in late November, foreshadowing yesterday’s rate cut.
Even so, investors, who have persistently had a gloomier outlook than theÃƒâ€šÃ‚Â Fed, were disappointed the Fed didn’t cut rates more or signal greaterÃƒâ€šÃ‚Â willingness to do so. Bond prices shot up and yields, which move in theÃƒâ€šÃ‚Â opposite direction, fell sharply. The 10-year Treasury note’s yield droppedÃƒâ€šÃ‚Â to 3.97% from 4.1% just before the announcement, while the two-year note’sÃƒâ€šÃ‚Â yield, which is especially sensitive to expectations of Fed action, fell toÃƒâ€šÃ‚Â 2.92% from 3.13%. Yields on corporate bonds rose relative to Treasurys.
Major banks, meanwhile, lowered their prime lending rates, the benchmark forÃƒâ€šÃ‚Â many consumer and business loan rates, to 7.25% from 7.5%.
The Fed has found it especially difficult to discern the economy’s path andÃƒâ€šÃ‚Â thus the right level for rates because the main threat facing the economy isÃƒâ€šÃ‚Â the reluctance of banks and investors to lend to homebuyers, businesses andÃƒâ€šÃ‚Â consumers. That’s harder to measure than the things like profits,Ãƒâ€šÃ‚Â inventories, employment and the Fed’s own interest-rate actions that usuallyÃƒâ€šÃ‚Â drive the business cycle.
“Well, the boys blew it again. You wonder which economy they are looking atÃƒâ€šÃ‚Â and what it is they are thinking about,” said Alfred Kugel, Chicago-basedÃƒâ€šÃ‚Â chief investment strategist for investment-management firm Atlantic Trust ofÃƒâ€šÃ‚Â Atlanta.
Brian Sack, an economist at Macroeconomic Advisers LLC, said that in 2001Ãƒâ€šÃ‚Â the major shock to the economy was the stock market. “We have a better shotÃƒâ€šÃ‚Â at trying to calibrate those wealth effects, whereas the credit turmoil hasÃƒâ€šÃ‚Â many dimensions to it. Frankly it’s hard to assess how much economicÃƒâ€šÃ‚Â restraint you get from those various dimensions.”
In the past month, data on the so-called real economy has been soft but notÃƒâ€šÃ‚Â dramatically so. Macroeconomic Advisers said yesterday it now expects theÃƒâ€šÃ‚Â economy to shrink marginally during the current quarter, then grow at a 1.8%Ãƒâ€šÃ‚Â annual rate in the first quarter of 2008.
On the other hand, credit markets have tightened sharply. Since Oct. 31, theÃƒâ€šÃ‚Â yields on securities backed by auto loans has jumped to 6.3% from 5.4%,Ãƒâ€šÃ‚Â while yields on securities backed by home-equity loans have jumped to 7.7%Ãƒâ€šÃ‚Â from 6.6%, according to J.P. Morgan Chase & Co. Rates on “jumbo” mortgagesÃƒâ€šÃ‚Â — those larger than $417,000 — are around 6.9%, up from 6.6%. The LondonÃƒâ€šÃ‚Â interbank offered rate, the rate banks charge each other for three-monthÃƒâ€šÃ‚Â loans in the offshore market — is a whopping full percentage point aboveÃƒâ€šÃ‚Â the expected federal- funds rate; it is typically less than a tenth of aÃƒâ€šÃ‚Â point higher.
There isn’t yet evidence these higher rates have significantly bit intoÃƒâ€šÃ‚Â consumer spending, outside of housing, and the rates could drop afterÃƒâ€šÃ‚Â year-end funding pressures ease. But investors generally don’t expect thatÃƒâ€šÃ‚Â to happen.
A survey by Macroeconomic Advisers of its clients, mostly hedge funds andÃƒâ€šÃ‚Â other sophisticated investors, found most expect little retracement of theÃƒâ€šÃ‚Â wide spreads between yields on risky debt and Treasury yields by next yearÃƒâ€šÃ‚Â and most expect banks to curtail lending. “The possibility of a widespreadÃƒâ€šÃ‚Â pullback in credit availability is a significant risk to the outlook,” theÃƒâ€šÃ‚Â firm said.