http://www.marketwatch.com/news/story/fed-investors-shouldnt-expect-much/story.aspx?guid=%7B70B9E9E9%2D1107%2D4F6F%2D8B2D%2D98A3D1581F03%7D&dist=hplatest
THE FED
Fed highly unlikely to ride to markets' rescue
Ex-Fed official says FOMC may not even mention recent volatility
By
Greg Robb, MarketWatch
Last Update: 11:42 AM ET Aug 6, 2007
WASHINGTON (MarketWatch) -- Participants in financial markets shouldn't get their hopes up that the Federal Reserve will intervene to alleviate the current market turmoil, a former Fed governor says.
"I think it is too early right now to think about any kind of intervention by the Fed," said Susan Phillips, now the dean of the George Washington University business school in Washington, in a telephone interview.
Phillips said that the financial markets' volatility is a painful but healthy "reality check" and that this has led to an overdue repricing of risk.
"We're in the middle of that process," Phillips said. "The Fed wants the market to find its own right place," she said.
The Federal Open Market Committee will meet to consider U.S. monetary policy on Tuesday.
At the moment, the emerging consensus among Fed watchers is that the Ben Bernanke-led Fed will hold interest rates steady but that the policy statement released after the meeting will add some wording about the troubles gripping the subprime mortgage sector.
"Frazzled nerves will not be sufficient for the FOMC to step in and lower the funds rate," said Richard Moody, chief economist at Mission Residential, in a note to clients. The federal funds rate, currently 5.25%, hasn't been changed since June 2006.
But for her part, Phillips said she thinks the Fed will hold its tongue on the market turmoil.
"To me, it is something like a 60% chance they won't say anything because they don't want to intervene," Phillips said.
Phillips also said that the Bernanke Fed likely has a very high threshold before it would intervene. In essence, Fed officials would only ease if the financial markets are close to becoming "inoperable."
The Fed might ease interest rates "if we were to have one of the really major [Wall Street] firms go under -- not one of the subprime operators -- and that caused severe liquidity problems in the market," Phillips said.
Phillips, a member of the Fed under previous chairman Alan Greenspan for seven years in the 1990s, said financial markets are much stronger today then when the so-called "Greenspan put," which guaranteed a market floor, held sway.
Phillips said Fed officials have a lot to discuss regarding the economic outlook. There are, for starters, questions about whether consumer spending is slowing down, and whether manufacturing can continue at a stronger pace in the second half of the year.
Phillips also said that there has only been a "slight improvement" in inflation and that the Fed will maintain inflation as its predominant policy concern for now.
"They have to" keep in place the bias against inflation, Phillips said.
Greg Robb is a senior reporter for MarketWatch in Washington.
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