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Bearish Economic News but Hawkish Comments from Fed Presidents

Tue, Nov 27 2007, 22:18 GMT
by Asha Bangalore

Northern Trust

Bearish Economic News but Hawkish Comments from Fed Presidents

The Conference Board’s Consumer Confidence Index and Case-Shiller Home Price Index presented bearish economic news today, but comments from Fed Presidents suggested a hawkish posture and minutes of the discount rate meeting in October reveal a split among Fed Presidents.

Starting with the Fed rhetoric, Chicago Fed President Evans is of the opinion that “while the risk is still present of notably weaker-than-expected overall economic activity, given the policy insurance” put in place he doesn't see this as likely. He also warned that an “overly accommodative liquidity provision could endanger price stability.” By contrast, on November 26, the Federal Reserve Bank of Chicago published the Chicago Fed National Activity Index which suggests a strong possibility of a recession (Chicago Fed National Activity Index (CFNAI) - Economic Research and Data, Federal Reserve Bank of Chicago).

President Plosser of the Federal Reserve Bank of Philadelphia largely reiterated his hawkish comments of three weeks ago. He indicated that economic data need to be weaker-than-expected for him to consider a revision of the outlook. He also added that one “cannot rule out the possibility that the Fed’s reduction in the fed funds rate target runs the risk of higher inflation and inflation expectations.” He elaborated further: “While the inflationary signs in recent months have been encouraging, I do not think we are in a position to be sanguine. If inflation begins to creep up or expectations of future inflation rise in the coming months – which is a risk given the FOMC’s decision to cut interest rates – the outlook will be affected and policy may have to be adjusted.”

The details of the discount rate meetings in October were also published today. The main take away from these minutes was that the only six out of the twelve regional banks requested a cut in the discount rate. Federal Reserve Banks of Richmond, Atlanta, Chicago, St. Louis, New York, and San Francisco requested reductions in the discount rate. The Federal Reserve Banks of Philadelphia, Minneapolis, Boston, Cleveland, Kansas City and Dallas preferred to leave the discount rate unchanged. Of these six banks, the Federal Reserve Bank Presidents of Boston and Kansas are voting members of the FOMC.

The Conference Board’s Consumer Confidence Index dropped to 87.3 in November from 95.2 in the prior month. The November decline is the fourth consecutive monthly drop and the lowest in the current cycle, excluding the declines related to the Iraq war in 2003 and Hurricane Katrina in 2005. The current reading is close to the low of the prior cycle (84.9 in November 2001). The index measuring respondents indicating that jobs are plentiful (23.2) is the lowest since November 2005. The ongoing war, weak economic conditions, declining equity prices, and the housing market crisis have each played a role in the pessimistic assessment of households.

The Case-Shiller Home Price Index fell 1.7% in the third quarter, marking the fifth consecutive quarterly decline. On a year-to-year basis, this price index dropped 4.5% from a year ago in the third quarter.

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Published on  Tue, Nov 27 2007, 22:21 GMT