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Old 11-01-2007, 09:03 AM
elva
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Post Economy Has Grown Steadily, But Housing Worries Remain

The Federal Reserve cut a key interest rate yesterday, continuing its campaign to keep the troubled housing market from causing a broad economic downturn. But the central bank also said it was worried that rising energy prices would lead to higher inflation -- a hint that it won't necessarily cut rates further in the coming months.

The rate cut will make it cheaper for consumers to borrow money via credit cards, auto loans and many home mortgages, and make it easier for companies to expand by taking on debt -- effects the Fed is hoping will stimulate the economy. Markets rallied on the news, but many analysts interpreted the fine print of the Fed's statement to indicate that they should not assume the central bank will keep cutting rates.

"They're saying to the markets: 'We gave you what you wanted today, but don't ask for another cookie,' " said Scott Anderson, a senior economist at Wells Fargo.

Growth has been solid in recent months -- a government report yesterday said that the economy grew at a stronger-than-expected 3.9 percent annual rate in the third quarter -- but the central bank indicated that it was worried that the good times won't last.

That's why the policymaking Federal Open Market Committee lowered the federal funds rate, a rate at which banks lend to one another, a quarter of a percentage point, to 4.5 percent. That followed a half-percentage point cut in September.

After wobbling initially, the Dow Jones industrial average ended the day up 137 points, or 1 percent. Investors generally favor rate cuts because they lower companies' cost of borrowing and might help avert an economic slowdown.

"The pace of economic expansion will likely slow in the near term," the policymakers said in a statement. But they added that the two rate cuts "should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

They also acknowledged the rapidly rising price of oil and other raw materials. Yesterday, oil traded at an all-time high of $94.53 per barrel, reflecting news that U.S. inventories had fallen sharply. "Recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation," the statement said. As a result, it said, "the upside risks [of] inflation roughly balance the downside risks to growth."

That language told economists that the central bank's next moves are up in the air. Yesterday's rate cut brought short-term interest rates to roughly what Fed leaders consider the "neutral rate," or the level that neither stimulates nor slows the economy.

Thus, what the Fed does next will depend on whether new data over the coming months indicate that inflation is heating up (in which case it might raise rates) or that growth is about to slow significantly (in which case it might cut them further).

"They've bought themselves flexibility," said Vincent R. Reinhart, a resident scholar at the American Enterprise Institute who until September was a top economist at the Fed. "They're saying they've got risks on both sides."

Many economists said yesterday that they expect Fed policymakers to leave rates unchanged at their next meeting, Dec. 11.

The move came a few hours after the Commerce Department reported that the economy grew faster than expected in the third quarter, with gross domestic product (GDP) climbing at a 3.9 percent annual pace. For most of the three months that ended Sept. 30, the impact of the late summer crisis in housing and credit markets had not had time to affect financial decisions.

The increase in GDP, a broad measure of the value of goods and services produced within U.S. borders, was driven by a 16.2 percent rise in exports and 3 percent gains in consumer spending. Those were enough to make up for a steep, 20.1 percent drop in investment in housing.

The big question ahead -- and a major worry that led the Fed to cut rates -- is whether consumers will keep spending money readily as the housing market gets worse.

"Housing has been going down dramatically, but the rest of the economy has been holding up remarkably well," said Nigel Gault, a U.S. economist with consulting firm Global Insight. "The worry is that while things have been very good, we haven't yet seen what the fallout is going to be from the dramatic tightening in financial conditions."

Unlike the unanimity displayed at recent Fed meetings, yesterday there was dissent. Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, voted to leave the federal funds rate unchanged, alone among the committee's 10 voting members. The statement, as is custom, did not elaborate on Hoenig's rationale.

Investors will be looking for more evidence the economy is weathering recent turmoil, which began in the market for low-credit quality mortgage loans and has spread broadly, when the Labor Department reports on October labor market conditions tomorrow.

In a preview of that release, payroll processing firm ADP said that overall national private payrolls appear to have risen by a healthy 106,000 jobs last month.

Source:
http://www.washingtonpost.com/wp-dy...03100661_2.html
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