Fed Governors, Traders Square Off Over Outlook

 |  Includes: AGG, DIA, SPY
by: SA Eli Hoffmann

Minneapolis Fed President Gary Stern said Monday the U.S. housing market has not bottomed, but was more upbeat on consumer spending, which will continue to be supported by strong employment and income. "The adjustment in the housing market has still some way to go. The reason I say that is because of the huge inventory of unsold homes," Stern told reporters in Singapore. "I would expect new home building to remain quite constrained. It is also true foreclosures will go up rather than down over the next several quarters." He noted housing represents only 5-6% of the U.S. economy, adding, "At least so far, other aspects of the economy have more than outweighed the housing sector." Stern had no comment on the direction of future Fed action. "We have to see how things evolve," he said (Reuters).

Separately, Fed governor Randall Kroszner said Friday upcoming weak economic reports would not justify additional interest rate cuts. "A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate," Kroszner said in New York. He added, "The downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation." Kroszner is a member of the FOMC, which decides interest rate moves, although he stressed the views were his own. Lehman Brothers analysts recently ruled out the possibility of a rate cut at the Dec. 11 FOMC meeting: "Recent Fed speakers have continued to stress the uncertainties around the forecast for both growth and inflation and their desire to see more data before easing further. We continue to look for the Fed to pause in December, but to ease 75 basis points by mid-2008," (AFP).

Meanwhile, Bloomberg says Treasury bond futures markets, in which volatility has risen four of the past five weeks, are sending the Fed a clear message: The U.S. economy is so weak the Fed will need to lower interest rates at least another 0.75% to avoid a recession. Investors are telling the Fed, "You're wrong and we're going to lead you to the next ease," said Thomas Tucci of RBC Capital Markets. Fed fund futures dictate a 78% chance of a 0.25% reduction to 4.25% Dec. 11, 58% odds of another 0.25% cut in January, and 31% odds of a further cut to 3.75% in March. "The Fed will not only need to save the financial markets, in very short order they're going to have to start saving the economy," Jefferies' Tom di Galoma said. (Bloomberg).

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