"Commentary"-Forecasting the Fed
Monday, August 06, 2007JEFF YASTINE: Tonight's commentator has a few thoughts on what the Federal Reserve will do this year when it comes to interest rates. Here's Bernard Baumohl, director of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: This summer has not been a dull one for Wall Street or the Federal Reserve. The collapse of the sub-prime mortgage sector has so unsettled the corporate debt market that many worry a full-blown credit crunch is just around the corner. Such a credit crunch can easily kill off this economic expansion unless, of course, the Fed intervenes and lowers rates.
Indeed, the futures market placed the odds of a rate cut later this year at 100 percent. However, others see a rate increase coming because they believe inflation remains too high. So what will the Fed do this year? Essentially, nothing. Here's why the Fed won't lower rates. First, we are far from seeing a credit crunch that would bring on a recession. There's still ample liquidity sloshing around the world. Second, despite all the housing woes, overall economic activity has in fact picked up, the second quarter GDP growth the fastest in more than a year. Third, not only is the economy operating near full employment, but the slack in manufacturing capacity is shrinking. A looser monetary policy now could be inflationary.
Finally, the dollar, which is already weak may suffer a harder fall with lower rates. So I see no rate cut coming, nor is a rate increase likely for that would further damage the housing market. Then there's the timing. A rate hike now would end up pinching the economy the most right around election time 2008. It's fair to say this Fed would prefer if at all possible to keep rates where they are. I'm Bernard Baumohl.
