Jobs picture gives Fed room to wait on rates

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Could this mean the economy is in beter shape than the dims have been saying? Could it be that the fallout from the credit crisis has been contained and that the economy can recover its momentum instead of fighting rearguard actions against the possibility of a downturn?

Jobs picture gives Fed room to wait on rates

Fri Oct 5, 2007 11:59pm BST

By Alister Bull and Mark Felsenthal

WASHINGTON (Reuters) - Surprisingly robust U.S. third-quarter employment growth gives the Federal Reserve breathing space as it mulls whether more interest rate cuts are needed to help the world's largest economy weather a housing slump and credit crisis.

Fed policy-makers, who aggressively cut the benchmark federal funds rate on September 18 after a report saying the economy had shed jobs in August, will feel less pressure to cut rates again at their October 30-31 meeting after fresh data that showed the labor market was actually not in such bad shape after all.

Interest-rate futures have trimmed back bets the Fed will cut by a quarter percentage point at the next meeting and in late Friday trade implied a 44 percent likelihood of a move, compared with a 72 percent chance before the latest jobs report.

This chimed with the findings of Reuters' latest poll, in which 10 out of 18 primary bond dealers surveyed thought the central bank would lower rates by a quarter point.

Upward revisions to the monthly employment report on Friday showed it added 89,000 positions in August, instead of losing 4,000, and there were 118,000 more jobs created in July and August than previously thought. It also added a bigger-than-expected 110,000 jobs in September, according to the Labor Department.

While that number puts the economy on pace for relatively modest employment gains, it suggests tighter credit and the prolonged housing downturn have not led to broad business retrenchment that has pushed the country toward recession.

"The September number alone suggests that economic growth has moderated, but it really hasn't fallen off the cliff at all," said John Silvia, chief economist for Wachovia.

The Fed's unexpectedly big half-point rate cut on September 18 was aimed at counteracting rapidly deteriorating credit conditions and giving economic growth a decisive shove, Vice Chairman Donald Kohn said in a speech on Friday.

Even without a complete picture of whether the housing slump and credit problems had spilled over to hurt the broader economy, policy-makers opted for a course they believed was the safest bet to deal with the circumstances they faced.

"I thought that economic performance would be better served by the Federal Reserve taking its chances on responding too much, or too rapidly, to the turmoil in financial markets rather than acting too little, or too slowly," Kohn told the Philadelphia Chamber of Commerce.

In addition to a less worrisome picture for growth suggested by the payrolls report, some signs of stability in credit markets emerged this week.

U.S. commercial paper outstanding grew for the first time since a surge in mortgage delinquencies triggered broader credit problems in August. Also, banks borrowed less at the Fed's discount window in the latest week, a sign that they were able to borrow through regular channels.

"At this juncture it appears that businesses are still reasonably confident and have access to credit so that they are expanding payrolls in various industries," said Lynn Reaser, chief economist at Bank of America Capital Management.

"We have a number of weak links, including housing (and) manufacturing ... but the economy is still moving forward and at this point the Fed may chose to pause and wait for more data, since it has moved proactively with that aggressive rate cut in September," Reaser said.

But former Fed Governor Lyle Gramley said Kohn's comments were a clear clue to expect another cut, because they highlighted the economy was already experiencing subpar growth before the financial crisis hit.

"I think you have got a solid case for (a quarter-percentage point cut)," he said. "If you are going to try to help the economy, it seems to me you want to help it early on."

Kohn said on Friday that growth had averaged around 2 percent since mid-2006, compared with long-run trend estimates of 2.5-3.0 percent, and the Fed's July forecasts were for a gradual increase in unemployment into next year.

http://uk.reuters.com/article/gc06/idUKN0521354520071005

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“the greatest job loss since the Great Depression.”

“the worst hiring slump since the Great Depression,”

- John Kerry

[Auburn85 432]

I'm so sick of the word crisis being used in this. The word "crisis" has been watered down to talk about any problem.

Dow still around 14k, but by god, if there is ever a 400 point loss , some in the media love to show those boys and girls on wallstreet with their hands on their head in disbelief. Makes you think soup kitchens are around the corner.

[otterinbham 0]

Well, yes and no.

With the mortgage industry meltdown and the drop in currency rates, the economy was on a tightrope.

The thing to remember is that, with the exception of major catastrophic events, the economy is basically how people feel about the economy. If there's confidence in the future, then the economy performs well. If people are doubtful about the economy, then it tanks.

The thing about the mortgage problem is that it is currently confined to a fairly narrow segment of the market, both geographically and in the mortgage market itself. For example, while variable rate mortgages are now showing a delinquency rate is above 5%, the delinquency rates for standard 30-year mortgages are at historical lows, as are credit card delinquency rates. The other factor to consider is that the mortgage "crisis" is almost completely confined to Florida, New York, California, Nevada, and the Great Lakes states. For example, one Florida house in about 250 is currently in foreclosure, while only one house in 3500 in Alabama is in foreclosure.

However, given how mortgage funds are very capital intensive and highly dependent on private investors, they are particularly shaky affairs. So if the Fed had not lowered the prime rate by a half point, we could have had real trouble.

In my opinion, the real key to growth over the past 27 years is really attributable to three different factors: Lower taxation rates, especially in capital gains and higher householod incomes, the lowering of barriers (both in deregulation and free trade), and the very adroit management of the money supply by Volker, Greenspan and Bernanke. Those three are as responsible for the prosperity of the country than Reagan, Bush 41, Clinton, or Bush 43.

The mortgage market will continue to convulse over the next several months, chiefly because we were dealing with a serious bubble market. However, I think what remains to be seen is the short-term effect that the overbuilt market will have on home values. It really won't be a problem in the Southeast outside of Florida, but it will have a serious effect on the economies of the West Coast and the Rust Belt.

[Auburn85 432]

good points.

i wonder what the % is of people keeping up with their mortgage and paying it?

i wonder why the people "feel" the economy may be bad?

maybe the media hyping this as a "crisis?"

a "crisis" would be 10% unemployment nationwide compiled with double -digit interest rates and $6 dollar gallon of gas or a category 5 hurricane coming ashore.

[otterinbham 0]

good points.

i wonder what the % is of people keeping up with their mortgage and paying it?

i wonder why the people "feel" the economy may be bad?

maybe the media hyping this as a "crisis?"

a "crisis" would be 10% unemployment nationwide compiled with double -digit interest rates and $6 dollar gallon of gas or a category 5 hurricane coming ashore.

The delinquency rate in adjustable rate mortgages is over 5% and climbed very rapidly in 2Q of 2007, setting off an understandable panic throughout the business world.

A 5% delinquency rate doesn't sound like a lot. But when you consider the razor-thin margins in the banking industry, a 5% loss can be a catastrophic hit if immediate relief from the central bank is not forthcoming. What's more, bankers are not only taking a hit on bad paper, but then they're also loaded down with foreclosed properties that have to be dumped on an already depressed housing market. If that happens, then you have house prices plunging across the board...See how things can quickly spiral out of control?

What's more, if a major lender such as Countrywide goes bellyup, a lot of individual investors take a bath. So there's a profound ripple effect throughout the lending, transportation and construction biz that's potentially far more damaging than if we were discussing a meltdown in the airlines or the automotive industry. After all, if mortgage bankers take a hit, not to mention bankers in general, then you have a curtailed ability to build and sell new housing units. That in turn wreaks havoc in construction, building supplies, warehousing, and rail. Further, capital lending from both banks and private investors dries, up, etc. etc. etc. That was what we were staring in the face back during the summer.

Even worse, a weak mortgage industry and depressed housing market means that we lose a major engine of economic growth--Home Equity Loans. Without people leveraging the equity of their homes, or having far lower home values, then people are far less able to finance education, home improvement, new cars, vacations, etc. etc. etc. That makes the problems in this industry far more dangerous than any similar panic in any other industry. So, yes, the word "crisis" is quite appropriate.

Remember that the economy runs off credit. If credit is not available, everything grinds to a halt. And I mean everything. That's why EVERYBODY in business was freaking out in July and August.