Monday, August 6, 2007

Former Fed Member Discusses Upcoming FOMC Meeting - Basically No Drop in Rates

Excerpts from a Market Watch article containing comments from a former Fed official under Greenspan basically states that the Fed will probably not drop rates.

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.

"We're seeing some constriction in some of the high-risk markets, but quite frankly, that is probably appropriate," Phillips 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 this week's 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.

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.

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