FYI | Nov 30 2007
By Greg Peel
US Federal Reserve chairman Ben Bernanke spoke moments ago at a reception in his honour in Charlotte, North Carolina. The forum was not one wich always intended a crucial speech on economics, but the timing is simply such. Suffice to say the reception was very well attended, by the press.
For the observers looking for clues as to whether the Fed will definitely cut rates on December 11, Bernanke was playing his cards close to his chest. It will all come down to economic data releases between now and then.
“The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products not only those related to housing and increased short-term funding pressures,” he said. “These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors.”
However, Bernanke is still concerned about inflation. He despairs that rising food and energy costs and a weak US dollar may yet upset what has to date been a well behaved inflation rate of no more than 3%. The Fed has come under criticism from one side of the economists’ fence for fuelling runaway inflation with the easing of monetary policy.
The most crucial data point will be, however, the December 7 jobs report for November. “Continued good performance by the labour market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending,” Bernanke said. He noted October jobs growth remained fairly solid, but that jobless claims have begun to creep up.
Apart from jobs numbers, Bernanke noted the consumer spending figures due out Friday (tonight AEST) and the consumer sentiment number due also on December 7.
He did suggest that recent economic data have been “mixed”, but he noted household spending indications had been on the “soft side”.
“I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead,” he suggested.
So it all comes down to one more week of data releases. Listening to the rhetoric, one would believe that Bernanke might be tossing up between a 25 basis point cut or no cut at all. The Fed fund futures market has already factored in a 100% chance of a 25bps cut, and a 65% chance of a 50 point cut. So is he in fact toying between 25 and 50? It doesn’t sound like it.
The Fed futures also had better than a 100% chance of a 25 point cut in October, indicating there were those who believed 50 would be forthcoming that time around. It wasn’t. But things do seem to have deteriorated somewhat since then.
Either way, no real clues from the speech. I’d say, however, that 50 basis points looks less likely. I am not, however, an economist. But the US stock market will likely react poorly to no cut, mildly to a 25 and take off on a 50.
Quotes courtesy of Dow Jones.
