Fed Funds Speculation Comes Into Focus

First, subprime mortgage mess. Second, Bush needs to speak English. Third, Federal Funds speculation. What did I tell you about the Feds? About time…

Quoted from http://www.foxbusiness.com/markets/economy/article/fed-funds-speculation-comes-focus_397956_3.html:

Fed Funds Speculation Comes Into Focus

Friday, Dec. 7 2007

Up and Coming

Fed Funds Speculation Comes Into Focus

By Mark Lieberman, Senior Economist FOXBusiness

In a busy week, initial focus will be on Tuesday’s meeting of the Federal Open Market Committee, with opinions split between what the policy-setting committee should do and will do. The general agreement though is the FOMC will reduce the Federal Funds rate – the rate banks charge each other for overnight loans – but the question is how much: half a percentage point to 4% or one-quarter of point to 4.25%.

“The Fed could have avoided additional cuts if had been more decisive earlier in the game,” offered Diane Swonk, chief economist of Mesirow Financial. “Having a dissent in the middle of financial turmoil cost them credibility. The result is that they now will need to move 50 [basis points – one half of a percentage point] on Fed Funds and the discount rate to restore the confidence that should have been restored earlier in the financial system.”

Kurt Karl Head of Economic Research & Consulting, NY Swiss Re, partially agrees.

“The Fed should cut 50 basis points [half a percentage point] because the risk of recession is very high and inflation pressures are easing rapidly,” he said. “The Fed is most likely to cut by 25 basis points [one quarter a percentage point] because many members of the FOMC believe that inflation risks are more elevated.”

Karl punctuated his view in his monthly economic outlook report, suggesting “it is possible that a recession has already started.” If the FOMC doesn’t cut the Fed Funds rate by half a percentage point next week, Karl said the committee would cut rates by a quarter of point at each of its next three meetings.

The impact of the expected cut will be felt immediately with lower rates for home equity lines of credit and auto loans as well as some credit cards, boosting consumer spending. Swonk believes if the Fed acts more aggressively it will lead to stronger growth in the second half of next year.

William Longbrake, senior policy advisor for the Financial Services Roundtable, also suggested the Fed should cut by half a percentage point because “the credit crunch is severe and a substantial rate cut is required to bring down the cost of credit and loosen up credit availability.” A one-quarter point reduction though is more likely because of “continued high energy prices, moderate strength in payroll employment and Fed’s strong desire to pause [which it] articulated at its October meeting.” Longbrake echoed Swonk’s concern saying the Fed would be “tentative easing rather than decisive.”

The emphasis on Tuesday’ meeting may detract from important reports later in the week, not the least of which will be Thursday’s data on retail, which will be complicated with early holiday sales immediately after Thanksgiving and the boost in gasoline prices. Gasoline sales are part of the retail sales numbers; about $1 of every $8 we spend is spent on gasoline. Both the holiday sales and higher gasoline prices should provide a boost in the overall level of sales but not necessarily a sustainable increase. The key numbers to look at will be sales at food stores and other retailers who sell basic necessities.

The FOMC will closely watch Friday’s Consumer Price Index which, if consensus forecasts are correct, would send all-item inflation to 4.1%, its highest level since July 2006. The “core” inflation rate (excluding food and energy) though would remain benign at 2.2%. While the Fed typically looks at the core rate, Fed Vice Chairman Donald Kohn acknowledged in an appearance last week the importance of the all-item inflation rate in shaping consumer attitudes and expectations which could turn out to be self-fulfilling prophecies.

MONDAY, Dec 10                             NO DATA RELEASES



TUESDAY, Dec 11                            Job Openings and Labor Turnover Survey: October

                                                             Wholesale Trade October Consensus: +0.6%; September Actual: +1.3%

                                                             Federal Open Market Committee: Consensus Fed Funds Rate:

                                                             4.00%-4.25%; October 31: 4.50%



WEDNESDAY, Dec 12                     MBA Application Index Week ended Dec. 7

                                                              International Trade October Consensus -$57.3 billion; September Actual:                                                                -$56.5 billion

                                                              Import Prices November Consensus +2.0%, October Actual +1.8%

THURSDAY, Dec 13                          Unemployment Insurance Claims Week Ended Dec 8 Consensus                                                                            337,000; Week Ended Dec 1: 338,000

                                                               Producer Price Index (all items) November Consensus +1.5%;                                                                                     October Actual +0.1%

                                                               Producer Price Index (excluding Food and Energy) November Consensus                                                               +0.2%; October Actual 0.0%

                                                               Retail Sales November Consensus +0.5%; October Actual +0.2%

                                                               Retail Sales excluding autos November Consensus: +0.6%; October                                                                        Actual +0.2%

                                                               Business Inventories October Consensus +0.3%; September Actual                                                                           +0.5%



FRIDAY, Dec 14                                  Consumer Price Index (all items) November Consensus +0.6%; October                                                                    Actual +0.3%

                                                               Consumer Price Index (excluding Food and Energy) November                                                                                    Consensus +0.2%; October Actual +0.2%

                                                               Industrial Capacity November Consensus +0.1%; October Actual -0.5%

                                                               Capacity Utilization Rate November Consensus 81.7%; October Actual                                                                        81.7%

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president at Washington Mutual, where he was manager of economic analysis and research. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He has a degree in Economics from the Wharton School of the University of Pennsylvania.