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US: FedWatch

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Fed Open Market Committee, January 17

Fri, Jan 18 2008, 08:45 GMT
by Luis Arregoces

BBVA Bancomer

Ben S. Bernanke testimony before the committee on the Budget, U.S. House of Representatives

· Bernanke indicated that the baseline scenario for economic activity has worsened and the downside risks to growth have increased

· The speech is consistent with our current expectations of a 25-50 bp cut in the next FOMC meeting

· The Fed supports the rapid implementation of temporary measures to stabilize economic activity, which includes a fiscal stimulus package

Mr. Bernanke indicated that the Fed has taken all the right measures to help markets return to more “orderly functioning”; however, monetary policy alone is not enough and a serious fiscal stimulus package is necessary to help revive economic growth.

His statement regarding current information points out to a worsening in the economic outlook for 2008 and increasing downside risks to growth. Various factors such as increasing energy prices combined with falling home prices are likely to curb consumer spending in 2008.

The Fed Chairman explained that a fiscal and monetary stimulus together could help economic activity in the near-term more than the monetary policy actions alone. Nevertheless, two of the shortcomings of the implementation of a fiscal stimulus are the timing, because it has to work its way through the economy within twelve months in order to be successful, and the negative impact that it might have on the future fiscal situation. The Fed Chairman speech supports the rapid implementation of temporary measures to stabilize economic activity; it is clear that the Fed wants to avoid, by all means, a recession path in coming months. Bernanke and Governor Mishkin have said in their last speeches that they favor greater “insurance” against the prospect of an economic downturn. This implies that more rate cuts are likely if there is no improvement in financial markets

The risk of inflation is present and the Fed recognized the fast pace of food prices and energy prices in 2007 as well as the recent increase in core price inflation.

In addition, Bernanke stated, once again, that the Fed monitoring closely all the developments in the economy and is ready to take “substantive additional action” to help the economy forestall the adverse effects of the ongoing adjustment in financial markets. The Fed actions could be restricted if inflation expectations do not remain well anchored.

The weakness in the economy and the need for additional monetary stimulus is consistent with a scenario of more drastic rate cuts in coming meetings. Our expectations are in line with a 25-50 bp rate cut in the next FOMC meeting.

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Published on  Fri, Jan 18 2008, 08:56 GMT