Wall street interest rates unchanged at 5,25 %Sorry, Wall Street
Ben Bernanke and the Fed offer a nod to financial dangers from the credit
squeeze, but leave interest rates at 5.25%
by Peter
Coy found at businessweek.com
Federal Reserve Chairman Ben Bernanke refused to give a jittery Wall Street
what it was looking for on Aug. 7—a promise of easier money. But the market,
after an initial sell-off, decided the news wasn't so bad after all. Traders'
confusion over the market's recent turmoil was evident as stocks quickly fell
and then just as quickly jumped. Up as much as 1.4% on the day, the Standard
& Poor's 500-stock index closed the day with a gain of about 0.6% at
1,476.71.
Bernanke and the other members of the Federal Open Market Committee (FOMC),
which sets short-term interest rates, voted to keep the Fed funds rate at 5.25%,
as expected. The committee voters held stubbornly to the view that higher
inflation is a greater risk than slower growth. The Fed stated, "Although
the downside risks to growth have increased somewhat, the committee's
predominant policy concern remains the risk that inflation will fail to moderate
as expected."
Reading between the lines, some optimistic Fed-watchers said the central
bankers were acknowledging the risk of contagion from the subprime lending
market to the rest of the credit markets and the economy—without saying they
were riding to the rescue.
Danger: Credit Crunch?
Wrote T.J. Marta, RBC Capital Markets fixed-income strategist, "This
statement merely acknowledges the obvious risks stemming from short-term
perturbations while focusing on the more stable medium-term, macroeconomic
outlook."
Bernanke is stuck in an increasingly difficult position. Credit has gone from
lushly abundant in July to just adequate in August, and many economists worry
that an outright credit crunch is taking shape. Subprime mortgage borrowers are
having a hard time getting loans, and standards have tightened even for prime
borrowers. Some corporations, too, report rising borrowing costs.
The ordinary remedy for a credit crunch—if one emerges—is to pump more
money into the financial system. But Bernanke worries that doing so would ignite
inflation and possibly cause another bubble in housing or the financial markets.
Some economists argue that the housing bubble that recently popped was created
by overly loose money under Bernanke's predecessor, Alan Greenspan.
Productivity Below Expectations
In many ways, the Fed is back in the jam of 2000, when the tech-spending
bubble was bursting and the stock market was falling from its record highs, says
Merrill Lynch economist David Rosenberg. Wrote Rosenberg before the Fed's
action, "There are vivid signs of contagion just as there were back then.
The economy today is arguably cooling off at a faster pace than it was in the
latter part of 2000, and the unemployment rate has moved off the bottom just as
it did back then."
Complicating matters for the Fed, hours before it announced its rate
decision, the government announced an increase in non-farm business productivity
that was below expectations: 1.8% at an annual rate in the second quarter vs.
expectations of 2% or more. Combined with rising pay, that meant the labor cost
of producing one unit of output rose at an annual rate of 2.1%. That "took
the year-on-year rate up to a seven-year high of 4.5%," Rosenberg notes.
Growing productivity keeps a damper on inflation because people who are more
productive can be paid more without straining employers' ability to pay. The
housing downturn is probably responsible for the poor productivity showing,
since builders are putting up far fewer homes but have cut employment only
slightly, at least in the official statistics, says economist Kevin Cummins of
UBS (UBS).
Some Good News
On the other hand, the news for Bernanke hasn't been all been bad. Gasoline
prices have fallen nationally by about 30 cents from their early-summer peak in
spite of continued high prices for crude oil. And stripping away volatile prices
for food and energy, inflation has been moderating. The Fed's favorite gauge,
the core personal consumption expenditures price index, rose a modest 1.9% in
June, down from 2% in May. Although the economy is expected to slow in the
second half, it managed to grow at a 3.4% annual pace in the second quarter.
Faced with conflicting evidence—sudden panic in the financial markets vs.
reasonably healthy performance in the real economy—Bernanke & Co. chose to
stand pat and leave monetary policy just the way it was.
Coy is BusinessWeek's
Economics Editor.
Antwerpen Real Estate
Insult to Injury: Alzheimer's Patient Loses Home
due to subprime
foreclosure
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“There’s so much inventory out there that the buyer can pick and choose,” said Susan Sirles Fidler, a Realtor at Re/Max 10, Oak Lawn. But she cautioned, “The stuff that’s almost free is almost free because it’s going to cost you an arm and a leg to put it back together. It’s not buyer beware as much as buyer be smart.”
