By Robert Stock The Federal Reserve is signalling its willingness to prevent a further erosion in c...
By Robert Stock
The Federal Reserve is signalling its willingness to prevent a further erosion in confidence, according to Credit Suisse First Boston (CSFB), but the risk that there will be near-zero growth in the first quarter of 2001 is rising.
Neal Soss, an analyst at CSFB, said the market had already almost fully priced in another 50-basis-point rate reduction for the 3031 January FOMC meeting.
Soss said: "By the time we sit down to our 4 July barbecues, much of the 175-basis-point cycle of monetary tightening from 1999 and 2000 should be reversed. Indeed, if the data continues to deteriorate at the current pace, a 5% Fed funds target might be realised sooner."
Consequently, CSFB has revised downwards its fourth-quarter GDP forecast to 2.0% from 2.7% on the back of disappointing economic indicators in December.
Soss said: "The bad news is that the Fed rate cuts, the recent one especially tailored with the news media in mind to achieve maximum news impact on the household sector, are likely to be competing for airtime with a nasty stream of economic headlines."
In December there was a dramatic decline in auto sales and holiday sales remain lacklustre. Both of these are expected to hit consumer numbers. Inventories have also built up.
A huge correction is in the pipeline, though has not yet materialised, Soss said, but he anticipates it will bring a slowing of industrial production which will drag on first-half GDP growth.
There are also fears that labour-hoarding, the historical tendency of employers to be reluctant to cut jobs at the first sign of a slowdown, has been eroded by real-time management information systems.
This fear, supported by rises in jobless figures, would remove a traditional buffer to support consumer demand during the initial phases of a business slowdown.
Despite this gloom monetary easing is likely to be soon, joined by fiscal easing as revised official long-term budget estimates project around $1.5 trillion of surplus reserves over the next 10 years. CSFB believes that this is likely to be used to deliver tax cuts to US households.
Soss said: "The good news is that monetary policy and fiscal policy have ample room to get aggressive, if the need arises.
"The funds rate is still well above historical averages relative to the Fed's preferred measure of core inflation. The FOMC statement accompanying the recent rate reductions reaffirmed the central bank's faith in the productivity upsurge of recent years, implying there is plenty of room for growth without concern for jeopardising price stability."
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