Fed May Delay Reversal of Cuts as Payrolls Decline (Update1)
By Craig Torres
March 8 (Bloomberg) -- The Federal Reserve may keep lowering interest
rates, and postpone the ``rapid reversal'' of reductions that officials discussed in January, as the housing rout erodes hiring and spending.
Yesterday's employment report, showing the economy lost 85,000 jobs in the first two months of 2008, altered economists' and traders' expectations for how much the Fed will cut rates and how long it will hold them down.
Increasing signs the U.S. is in a recession, along with a further deterioration in credit markets, spurred traders to bet the Fed will cut its benchmark rate as low as 1.75 percent by June. The weakening
housing and labor markets are also putting pressure on the Bush administration to do more to stem the surge in foreclosures and ease a shortage of cash in money markets.
``The economy faces considerable headwinds and rates will have to stay low,'' said
Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington. ``Weakness in payroll growth, falling confidence, declining wealth, and tighter credit conditions all add up to a weak outlook.''
Macroeconomic Advisers and JPMorgan Chase & Co. analysts changed their Fed rate forecasts to a three-quarter-point cut from the present 3 percent at the March 18 meeting. They previously expected a half-point move. Banks including HSBC Holdings Inc. and Goldman Sachs Group Inc. also lowered their predictions for this year.
Response to `Crash'
``The Fed's doing what it can,''
Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, said in an interview in Paris. ``It's very limited what monetary policy can do in the wake of a once-in-many-decades housing- price crash.''
Fed officials themselves acknowledged the limits this week, even as they announced a new effort to inject funds into the banking system to offset a deeper credit crunch.
``We are placing too much burden on monetary policy in dealing with financial crises,'' Kansas City Fed Bank President
Tom Hoenig said in a speech in Rio de Janeiro today. ``We need to place more emphasis on other macro policy options to deal with the economic consequences.''
The Treasury Department, which has opposed the use of taxpayer money to shore up the housing industry, is talking to banks, other regulators and community advocates about further steps to curb foreclosures.
`Additional Solutions'
``Conversations are confidential, but I am impressed that they are looking for additional solutions to the problem,'' said
John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington.
Congressional Democrats have pushed the Bush administration to step up its response, proposing the use of government funds to purchase distressed mortgages. Bond traders this week speculated the government may guarantee mortgage-backed debt issued by Fannie Mae and Freddie Mac, though Treasury spokeswoman
Jennifer Zuccarelli today rejected the idea.
Fed officials also indicated that further initiatives are needed to alleviate the housing slump.
Chairman
Ben S. Bernanke, 54, this week said ``more can and should be done'' by lenders to avert foreclosure. He recommended ``principal reductions that restore some equity for the homeowner.''
Boston Fed President
Eric Rosengren, who researched credit crises in New England and Japan in the 1990s, said falling home prices are locking distressed borrowers out of refinancing options.
Cost of Delay
``There may be a significant cost to delaying needed actions that could restore confidence in the ratings process, the pricing of financial assets, and the impact of declining house prices,'' Rosengren said March 6.
Nationally, home
prices fell 9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record-keeping, according to the S&P/Case-Shiller home-price index. Economists at Lehman Brothers Holdings Inc. forecast prices will decline another 10 percent.
So far, Treasury Secretary Paulson has embraced private- sector solutions such as a voluntary loan modification program. Democrats have faulted the Hope Now alliance of mortgage lenders for failing to do enough to stop record foreclosures.
``People need help now -- not just `Hope Now,''' Senate Banking Chairman
Christopher Dodd, a Connecticut Democrat, said in a statement this week. ``The administration, whose lax oversight led to this crisis, has put only a flimsy plan in place that failed to offer enough.''
`Rapid Pace
For the Fed, the deepening housing crunch means officials may need to postpone a future battle against inflation. At the Jan. 29-30 meeting, some officials considered the central bank might need to raise rates in a ``rapid reversal'' when the economy recovers, minutes of the gathering showed Feb. 20.
Chicago Fed President
Charles Evans said last week that taking back rate-cut ``insurance'' can make clear that the Fed is committed to containing inflation. By contrast, New York Fed President
Timothy Geithner yesterday stressed that ``monetary policy may have to remain accommodative for some time.''
``They want markets to believe rates will be low for long,'' said
Bruce Kasman, chief economist at JPMorgan in New York.
To contact the reporter on this story:
Craig Torres in Washington at
ctorres3@bloomberg.net
