Fed's Poole: Further Rate Cuts Could Be Necessary

Includes: AGG, DIA, SPY
by: Judith Levy

St. Louis Federal Reserve Bank President William Poole said Wednesday he believes the current period of turmoil in the markets is not over, and that the housing slump could have a substantial impact on overall economic growth. The Federal Open Market Committee, of which Poole is a voting member this year, will next meet on December 11. "It is easy to imagine a scenario where another rate cut is called for," Poole said. "The loss of wealth associated with the decline in housing prices, as well as the fact that mortgage payments will absorb a larger portion of disposable income for some consumers, might cause consumption -- the largest component of GDP -- to grow at a significantly slower rate." That said, Poole warned that the Fed must be careful to do "what is necessary, but not more." The Fed has cut the benchmark fed-funds rate twice in the past two months, dropping it from 5.25% to 4.5%. The markets put the odds of another quarter-point cut at 70%. "[T]he downdraft from the housing industry [could] spread to other sectors, which might require that recent rate cuts not be reversed, or even that additional cuts would be in order," Poole said. In related news, Federal Reserve Bank of Richmond President Jeffrey Lacker said Wednesday he believes current Fed policy to be where it should be. "I think we have the balance about right, right now," he said. On Tuesday, non-voting member Charles Plosser said he would not support another rate cut unless the economic slowdown got significantly sharper than the currently projected 1.5% GDP growth (full story).

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