But after the release of the minutes for the March 18 Fed meeting which dropped rates 0.75%, some testing of sentiment is underway with stories being floated of a possible slowing in rate cuts by the central bank. "Federal Reserve officials signaled they will slow the pace of interest-rate cuts even as they concluded ``some contraction in economic activity'' is likely," Bloomberg reported in a follow up story to its initial report on the Fed minutes..
"Some Federal Open Market Committee members saw the danger of a ``prolonged and severe downturn,'' according to minutes of its March 18 meeting released yesterday. Still, ``monetary policy alone could not address fully the underlying problems in the housing and financial markets,'' the minutes said. The Fed dropped benchmark lending rate 2% in the first 11 weeks of the year, the fastest cut in 20 years; there's $US168 billion of fiscal stimulus, and several steps to increase liquidity in financial markets all to be assessed.
The Fed's had dropped the Federal Funds rate to 2.25% from 5.25% in September and most economists reckon it will go to 1.25% to 1.75% by the end of June-July. But what if it doesn't. After all it has done more than enough to steady the economy and sentiment to the point where the likes of John Mack, the embattled head of investment bank, Morgan Stanley, could tell shareholders yesterday he sees the light at the end of the tunnel.
The minutes show the staff told the Open Market Committee members that they had "substantially revised down'' their forecast to show a first- half contraction in gross domestic product, with a "slow rise'' in the second half. Next year, the staff projected growth "somewhat above'' the economy's long-term potential pace, the minutes showed.
The National Association of Realtors said its index of signed purchase agreements dropped to 84.6, the lowest level since records began in 2001. The Fed minutes also showed that the question of an "adverse feedback loop,'' where lenders reduce credit, hurting growth and causing lending to contract further, was discussed.
"Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity,'' the minutes said. The Minutes said: "The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half," i.e. a recession in the US in the first half; now.
The Fed minutes said, however, that there was a possibility that an economic slump could be lengthy. "Some (policymakers) believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market," the minutes said. The minutes said the rising prices for oil and other commodities, as well as stressed financial and housing markets, had weighed down on the near-term economic outlook.
The $US7 billion deal will inject new capital into the struggling giant, which was looking shaky. In exchange for that aid another 3,000 jobs will go, 186 offices will close and the company revealed a $US1 billion first quarter loss and more to come in the second quarter.
It only raised $US3.9 billion in December, shut offices and sacked 3,100 people, but that wasn't enough. There will be a lot more pain before there's any gain. And the banks have to start lending on deals, homes, and to business in growing levels for there to be a meaningful recovery. And for that to happen, asset prices, especially US house prices, commercial property values and bank share prices have to stabilise
