Friday, September 28, 2007

The Fed is More Frank About the Situation the Housing and Capital Markets

The following comments from Dennis Lockhart, President of the Atlanta Federal Reserve Bank, are more frank about the condition of the housing and capital markets. Also his comments included some of the justification for the rate cut. From Market Watch:

The bottom of the housing market may not be reached until the second half of 2008 or later, according to Dennis Lockhart, the new president of the Atlanta Federal Reserve Bank.

"I believe the bottom of the housing downturn could be a ways off -- potentially the second half of 2008 or later," Lockhart said Friday in a speech at Middle Tennessee State University.

The persistence of the housing downturn seems likely to cause some drag on consumer spending, Lockhart said. He added that the balance of risks has shifted from higher inflation toward slower growth.

"I believed, and still do, that the factor weighing most heavily on this change in the outlook has been the potential negative ramifications of the financial turmoil," Lockhart commented. (my emphasis)

He believes that the Fed could steer the economy into a soft landing, comparing monetary policy to flying an airplane: "I believe the current Fed policy abets a flight path of lower but still positive growth with moderate inflation." *

But Lockhart quickly said that "more turbulence may be ahead."

Conditions in the financial markets have improved to some degree since August, he reported. In the past two weeks, stress in the market for asset-backed commercial paper has shown signs of subsiding, he elaborated.

While inflation remains at the upper bounds of his comfort zone, Lockhart said that the Fed has made progress against it. "That's why I believe the recent moderation of inflation readings allowed a tactical move to reduce risks to the general economy with a federal funds rate cut."

Lockhart dismissed suggestions that the Fed rate move increased moral hazard. "I didn't see the logic of subordinating the general welfare of our nation's economy to the possibility that some participants in financial markets might draw tainted conclusions about the future landscape of risk."

*By the way, a soft landing is defined as The avoidance of both inflation and high interest rates as well as a recession as an economy slows its growth rate. opposite of hard landing. A hard landing is defined as When the economy goes directly from a period of expansion to a recession. This might happen if a government or monetary authority is more restrictive in its fiscal or monetary policy than what is appropriate for the economy. Both terms come from, which is a quick dictionary of investing/finance/economic terms.

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