Need To Know News

Speaking in an interview with Bloomberg TV, Minneapolis Fed president Gary Stern said:

• The Fed faces a “challenging environment” on rates
• Inflation remains uncomfortably elevated, but is likely to fall in the next few month
• Stern sees “sluggish growth” over the next several quarters
• Stern sees most financial firms as “reasonably healthy,” but sees a risk of exaggerated negativity as a result of the credit crunch
• The Fed must “contain spillovers” in the market place, and that the to-big-to-fail issue must be addressed during calmer market conditions
• Stern says Freddie and Fannie, like Bear Stearns, cannot be allowed to fail
• The Fed is looking at banks exposure to GSEs
• Fed’s GSE backstops “fully appropriate”

The Atlanta FED president said the dollar’s recent appreciation should help keep inflation in check, and that significant uncertainty from the subprime mess still lingers.

The regional FED president also said the liquidity facilities will likely have to be removed before the FED is certain downside risks to growth are gone.

Dallas FED president Richard Fisher says:

* The housing market has yet to find a bottom

* Consumers “hammered” by falling real income; savers squeezed by negative real interest rates; business margins under pressure from high fuel and transportation costs

* Q2 GDP was probably better than the 1.9% initially reported, but the economy will slow “to a snail’s pace, if not completely grind to a halt” in H2. Slowdown could extend into 2009.

* CPI is underestimating effective inflation (owner’s equivalent rent is holding the headline number down)

* Commodities markets — like equity and bond markets — are “manic-depressive mechanisms” that overshoot on both the upside and the downside

* US risks widespread inflation and higher inflation expectations if recent burst of “cost-push pressures” isn’t worked through quickly

Speaking in Bloomington, Illinois, today, Chicago FED president Charles Evans says:

* Too early to say we’re nearing a bottom in housing, but it’s “less bad”

* Q2 GDP growth (1.9%) likely to be revised up (bright sides: trade deficit has shrunk a bit; productivity is strong). 7 months ago, Evans “was concerned things could turn out to be much worse”

* However, inflation is worse than forecast, and Evans takes a page from Plosser’s book and says headline inflation has been troubling, and should be an important concern for monetary policy. He is concerned about persistent price increases spurring inflation expectations. (His forecast is, of course, dependent on energy and commodity prices moderating)

* Since June forecasts, growth risks have increased and inflation risks remain elevated. Export growth may taper off as economies of major US trading partners slump

* Current Fed funds rate (2%) is accomodative but “not especially stimulative,” since credit is so tight. Further rate cuts aren’t likely (inflation expectations would ignite). But markets still need “substantial” liquidity, and recent liquidity facilities may be a better tool in that regard.