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If the Fed cuts key, short-term interest rates next Wednesday, it will be the Fed's seventh cut in eight months. Reductions to-date have pared a whopping 300 basis points from the Fed Funds rate to 2.25% from 5.25% in September 2007.
Help from Europe?
Given that the slowdown has been U.S.-centric, and caused in large part by the end of the U.S.'s housing boom, economist David H. Wang initially thought the Fed would be left to its own devices to jump-start demand. However, in light of recent data indicating that both German and French business confidence had dropped in March 2008, Reuters reported Thursday, Wang is now inclined to think that the European Central Bank will not stand-pat on interest rates much longer. "We're beginning to see the signs of a slowdown in Europe," Wang said. "I think another month or so of poor data and the ECB will be compelled to cut, despite some inflation pressure."
The ECB has kept its key, short-term rate, the refinance rate, at 4% throughout the Fed's easing cycle. A start of an ECB easing, Wang said, will both stimulate demand from Europe and give the Fed a window to "take a breather" and assess the impact of both monetary and fiscal policy stimulus in the U.S.
Further, the downside from the ECB maintaining a hawkish stance amid a Fed pause is very large for Europe, Wang argued. If the ECB does nothing and Europe's economy slows to a crawl, it will have missed valuable time to stimulate needed demand. Conversely, if the ECB cuts rates and later finds that growth remained adequate, it could always re-raise rates, "to keep the inflation genie back in the bottle," he said.
Inflation containment
"One rate cut is not going to disrupt [ECB President Jean-Claude] Trichet's best laid inflation plans," Wang said. ECB President Trichet is considered to be perhaps the strongest inflation hawk among the leaders of the world's major central banks.
The ECB cut would also serve to calm market participants, some of whom, Wang said, "will be in a total panic with the first negative economic datapoint after the Fed takes a breather."
"You have a lot of economic stimulus in the pipeline on the U.S. side, so a pause after a cut next week is rational," Wang added. "Then again, on the other hand, the world may be facing contraction forces we haven't seen in decades, so central banks have to be ready to provide more stimulus, which is where the ECB comes in to play."
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Reader Comments (Page 1 of 1)
4-25-2008 @ 7:19AM
al coholic said...
I've been around real estate for a long time and have experienced more than a couple recessions, where housing starts and sales plummeted.
This one is different. We are not just dealing with too much speculative inventory. We have a lot farther to fall now because all the houses (I'm sure this is a huge number) that are hitting the market through foreclosure and "fire sales" will seriously lower the appraised value of all real estate.
People have been paying their short term bills with home equity loans now for some time. The inevitable lower appraisals for their houses will severely limit this practice thus lowereing dramatically our consumer spending. Some banks are already running scared and freezing equity credit lines even if no delinquincy exists.
This will take years to sort out.
Maybe some of the slack in the housing market can be taken up by apartment builders.
4-25-2008 @ 7:23AM
al coholic said...
Sorry, this post was meant for a different post.