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US: FedWatch

FOMC September 18th Meeting

Thu, Sep 20 2007, 10:55 GMT
by Rae Anne Dodds

BBVA Bancomer

• The FOMC cut the fed funds rate by 50 basis points to 4.75% and lowered the discount rate by the same amount

• The statement shows concern about the potential impact on growth of tightening credit conditions, the disruption in financial markets and the ongoing housing correction

• Unless conditions improve in the near future, which is not likely, the FOMC could lower rates to 4.25% by the end of the year

Prior to the meeting there was uncertainty as whether the FOMC would implement a 25 or a 50 bp cut. The details of the discussion will be available on October 9th, when the minutes are released. The statement indicates a major concern on the economic outlook as “The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.” In fact, the available data presents a mixed picture and the path that the economy will follow is not clear. In our view, following the path of a strong cut is an indication that the Committee is attaching to a scenario were the likelihood of a severe slowdown is far from negligible. Given current economic conditions, it is hard to resist the temptation to say that future actions will depend on readings on economic activity, however, the emphasis of the Committee on “tightening credit conditions” and “the disruptions in financial markets” leaves the door open to more rate cuts. It is unlikely that the economy will show signs of strength in the near future and that credit conditions will ease significantly in the months ahead.

The Committee judges that some inflation risks remain. However, our interpretation is that as the Committee is paying close attention to the downside risks on economic growth, inflationary pressures appear to be less relevant, at least in the short term.

In our view, downside risks are likely to dominate the outlook in the near term, uncertainty regarding to credit conditions will remain and the data will be on the soft side. Future cuts on fed fund rates are likely.

Bottom line: In our view, credit concerns are likely to dominate the outlook in the near term and the data will be on the soft side. The probability of observing more “preventive cuts” on the fed fund rates has increased significantly. Developments in the financial sector have the potential to affect credit conditions in the overall economy and the stabilization process might take longer than expected. We believe that the commitment of the FOMC to “act as needed to foster price stability and sustainable economic growth” will lead to a fed fund rate of 4.25% by year end.

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Published on  Thu, Sep 20 2007, 10:52 GMT