Ben States His Case

January 12, 2008 at 10:55 am | Posted in economy, finance, USA | Leave a comment
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Ben States His Case

David Wyss, chief economist, Standard & Poor’s

[In his Jan. 10 speech] Bernanke’s worries about inflation were cited with uncharacteristic clarity: “[I]nflation expectations appear to have remained reasonably well-anchored, and pressures on resource utilization have diminished a bit.” However, to make sure we didn’t think that the Fed was getting too complacent, he also said that, “the increase in oil prices…is also lifting overall consumer prices and probably putting upward pressure on core inflation.”

But the speech stressed the risk to growth much more than inflation. “The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become much more pronounced.” The bottom line is that, “we stand ready to take substantive additional action as needed to support growth and provide adequate insurance against downside risks.” Markets interpret this statement to mean that the Fed will start to cut rates more aggressively, beginning with a half-point cut in January. Another cut, perhaps another half-point, is likely at the March meeting and again in April. The federal funds rate seems likely to fall to 3% by mid-year, rather than the 3.5% we had been assuming.

See More Fed Rate Cuts Ahead

Drew Matus, economist, Lehman Brothers

Bernanke’s speech Thursday [Jan. 10] tipped the balance to a 50 basis point rate cut at the end of the month. Gone is the balanced risks talk and in its place is a clear focus on the downside risks to growth. This also confirms that the Fed will fight hard to avoid a recession and suggests that Bernanke is asserting a stronger public role in guiding market expectations. We now see the Fed funds rate reaching 3.00%, its terminal level for this cycle, by August. Bernanke’s speech also suggested the credit crunch may be beginning to pinch consumers in areas other than mortgage finance, adding another headwind to energy prices, slowing job growth, falling home prices and an equity slump already buffeting the US consumer.

As he mentioned inflation only in passing and mostly emphasized why it should remain tame, we believe the Fed is squarely focused on growth for the time being. And, as a result, we now expect the Fed to cut rates by 50 basis points in January and deliver 25 basis points cuts in March, June and August.

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