A 25 basis point rate cut a certainty again after release of FOMC minutes

NEW YORK (Thomson Financial) - A 25 basis point rate cut in December was a certainty again after the release of the minutes from the Federal Reserve's last policy setting meeting, which indicated that nearly all of the voting members saw "substantial downside risks to the economic outlook."
December fed funds futures were down 0.01 at 95.675, which implied a 109% chance of that the Fed would lower its target for overnight rates by 25 basis points to 4.25%, and a 54% chance they would cut it to 4%.
Prior to the release of the minutes of the Federal Open Market Committee meeting, the December contract had hit an intraday low of 95.635, which implied only an 84% chance of a 25 basis point rate cut. Futures fell after the Financial Times reported that the Fed would indicate that it expected the U.S. economy to pull through the current economic rough patch and regain strength in 2008.
Late Monday, the odds of a 25 basis point cut was 115%.
The Fed's minutes said that "nearly all" of the voting members thought that monetary policy was "somewhat restrictive" partly because of tighter credit conditions, but indicated that the rate cut was a close call. The minutes suggested that the Fed was less concerned about inflation than about growth.

WASHINGTON (Dow Jones)--U.S. Federal Reserve officials generally expect a soft-landing scenario with moderate economic growth, stable inflation and lo

WASHINGTON (Thomson Financial) - The ongoing credit crunch has forced Federal Reserve governors and reserve bank presidents to drastically cut their real GDP growth projections for the US economy in 2008, although they still expect growth to rebound by 2010 to roughly the same level as 2007.
In its first three-year economic forecast released today, the Fed slashed its forecast for real GDP growth in 2008 to 1.80-2.50 pct, down from its June estimate of 2.50-2.75 pct.
"These revisions to the 2008 outlook since June stemmed from a number of factors, including the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices," the Fed said.
At the same time, the Fed cut its core inflation expectation for 2008 to 1.70-1.90 pct, down from 1.75-2.00 pct.
For the first time, the Fed made an estimate for headline inflation, which includes volatile food and energy prices that are removed from the core number. The Fed sees 2008 headline inflation at 1.80-2.10 pct.
Several economists and some Fed governors -- including Chairman Ben Bernanke himself -- have noted the increased risks that rising oil prices might pose to overall inflation, and some have said the Fed needs to add headline inflation to the data it monitors for this reason.
The Fed's specific expectations for GDP and inflation in 2008 are new, but largely in line with its more general pronouncements earlier this year that 2008 growth would be slower than 2007.
Despite the lower GDP predictions for 2008, the Fed made a slight upward revision to its GDP predictions for this year, to 2.40-2.50 pct from its earlier forecast of 2.25-2.50 pct.
The report also cut 2007 core inflation expectations to 1.80-1.90 from 2.00-2.25 pct. The Fed sees headline inflation this year in the range of 2.90-3.00 pct.
Looking beyond next year, the Fed says it sees both core and headline inflation in the range of 1.60-1.90 pct in 2010. Some economists have said the Fed's three-year inflation expectations could be seen as the Fed's target for inflation.
For growth, the Fed expects real GDP to rebound in 2009 to 2.30-2.70 pct, and then 2.50-2.60 pct in 2010. The Fed said it expects this growth to return as the housing market rebounds.
The forecast sees unemployment holding steady between 4.70 and 4.90 pct from 2007 to 2010. That's higher than the 4.25-4.75 pct range the Fed originally forecasted for 2007, and the 4.75 pct forecast for 2008.
The Fed earlier this month said its economic forecasts would extend to three years ahead, rather than the traditional two-year forecast.
The Fed's first three-year economic forecast included a new section outlining the perceived risks to the economic outlook, which said most Fed participants believe there are downside risks to the GDP outlook, mostly due to ongoing problems in the credit markets.
"The possibilities that markets could relapse or that current tighter credit conditions could exert unexpectedly large restraint on household and business spending were viewed as downside risks to economic activity," the report said.
It added that many are worried further economic weakness would lead to even tighter credit conditions and "slow the economy further."
The report said participants noted the risk of a "severe contraction" in the housing sector, but said the US economy "had proved quite resilient to episodes of financial distress," which suggests only a modest decline.
Elsewhere, the report said most participants believe there has been a modest decline in inflation this year, although they noted rising energy and commodity costs are a risk to this expectation.
Fed participants also said that the uncertainty surrounding their GDP forecast is "above typical levels in the past," although it said the uncertainty related to the inflation forecast was "broadly in line with past experience."
The Fed last week said it would provide an analysis on the level of uncertainty associated with these predictions, as part of its effort to bring transparency to its forecasts. In a separate paper released today, the Fed said "uncertainty about the economic outlook is considerable," but said that using a wide range of data allows predictions to be made with some certainty.
For example, it noted that about 70 pct of all historical outcomes have fallen within a one percentage point range of the predicted outcomes, and said looking at a wide range of forecasts therefore allows some certainty.
"Average differences in predictive performance across the forecasters in our sample are small, suggesting that we can use information gathered from a range of sources to help gauge the average magnitude of past uncertainty," the paper said.
The Fed noted that the uncertainty about real GDP growth in particular led to more diverse views among participants than there was in June. Differing views "seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market," and other factors like whether the housing turmoil would spread to other sectors of the economy.
The Fed also noted differing views on where inflation is headed, in particular the question of whether inflation expectations are well-anchored in the US.

UPDATE: Fed Sees Moderate Growth, Low Inflation Through '10

WASHINGTON (Dow Jones)--U.S. Federal Reserve officials generally expect a soft-landing scenario with moderate economic growth, stable inflation and low unemployment through 2010, though they acknowledged that greater uncertainty surrounds their growth forecasts. The forecasts, released for the first time Tuesday under the Fed's new quarterly release schedule and three-year forecast horizon, also suggest that officials have grown more pessimistic about the economy's ability to achieve the type of rapid, noninflationary growth that it did in the late 1990s and early this decade. They also signal that officials have an informal inflation goal of a little less than 2% over the medium term. Federal Open Market Committee members lowered their 2008 gross domestic product growth forecast to between 1.8% and 2.5% from their previous forecast in June of 2.5% to 2.75%, the Fed said Tuesday. That downward revision "stemmed from a number of factors, including the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than- expected housing data, and rising oil prices," the Fed said in a statement accompanying its forecasts. FOMC forecasts used to be released twice a year with a two-year horizon. They are presented as a central tendency, meaning the highest three and lowest three of FOMC members' forecasts were excluded. The range of GDP forecasts for next year varied widely, from 1.6% to 2.6%. "The dispersion of participants' projections for growth next year seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market, the effect of financial market disruptions on real activity outside of the housing sector, and the speed with which financial markets will return to more normal functioning," the Fed said. The FOMC sees GDP this year up 2.4% or 2.5%, suggesting that after robust growth in the second and third quarters, officials foresee a marked slowdown this quarter to only around 1.5%. The Fed expects GDP to grow between 2.3% and 2.7% in 2009 and 2.5% to 2.6% in 2010. Wall Street economists are eying the 2010 forecasts as a proxy for how fast the Fed thinks the economy can grow over the long run without boosting inflation. Growth in the 2.5% to 2.6% range is well below previous estimates of the economy's growth potential that once exceeded 3%. Indeed, even growth in the mid-2% range should keep the unemployment rate below 5%, according to the Fed's forecasts, another indication that officials think the growth potential is lower now. Inflation is expected to stay under wraps, with the Fed's preferred inflation gauge - the price index for personal consumption expenditures excluding food and energy - rising between 1.8% and 1.9% this year and 1.7% to 1.9% in 2008. Both of those forecasts were lower than in June. Officials expect core inflation to hover between 1.7% and 1.9% in 2009 and 1.6% to 1.9% in 2010. As is the case with GDP, the Fed's 2010 inflation forecasts will be viewed by Wall Street as an unofficial inflation target. "Participants' projections further out were also influenced by their views about the rate of inflation consistent with the Federal Reserve's dual mandate," the Fed stated. Annual core PCE growth is currently within that 1.6% to 1.9% range, at 1.8% through September. Officials also expect headline PCE to be between 1.6% and 1.9% in 2010, though headline PCE is expected to top the core this year and next as energy prices remain elevated. The range of forecasts for core PCE was much narrower than the variance in GDP forecasts. "The uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience," the Fed stated, while uncertainty was greater than usual for GDP. Officials also advised that their economic and inflation forecasts not be taken too literally. "Considerable uncertainty attends these projections," the Fed said, while "the future path of the economy can be affected by myriad unforeseen developments and events."

Fed cuts 2008 GDP growth forecast to 1.80-2.50 pct from 2.25-2.75 pct

WASHINGTON (Thomson Financial) - The ongoing credit crunch has forced Federal Reserve governors and reserve bank presidents to drastically cut their real GDP growth projections for the US economy in 2008, although they still expect growth to rebound by 2010 to roughly the same level as 2007.
In its first three-year economic forecast released today, the Fed slashed its forecast for real GDP growth in 2008 to 1.80-2.50 pct, down from its June estimate of 2.50-2.75 pct.
"These revisions to the 2008 outlook since June stemmed from a number of factors, including the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices," the Fed said.
At the same time, the Fed cut its core inflation expectation for 2008 to 1.70-1.90 pct, down from 1.75-2.00 pct.
For the first time, the Fed made an estimate for headline inflation, which includes volatile food and energy prices that are removed from the core number. The Fed sees 2008 headline inflation at 1.80-2.10 pct.
Several economists and some Fed governors -- including Chairman Ben Bernanke himself -- have noted the increased risks that rising oil prices might pose to overall inflation, and some have said the Fed needs to add headline inflation to the data it monitors for this reason.
The Fed's specific expectations for GDP and inflation in 2008 are new, but largely in line with its more general pronouncements earlier this year that 2008 growth would be slower than 2007.

Fed saw economy slowing even with 'close call' October 31 rate cut

WASHINGTON (Thomson Financial) - The decision for a quarter-point interest rate cut was a "close call" for many members of the Federal Open Market Committee on October 31, but even with that "further easing," they still expected economic growth to slow over the next few quarters.
The FOMC debated the "relative merits" of a quarter-point reduction in the Fed funds target rate to 4.5 pct versus "awaiting additional information on prospects for economic activity and inflation" before making a decision, according to the meeting minutes released today.
"On balance, nearly all" of the FOMC members decided the current stance of monetary policy was "somewhat restrictive," partly because of tighter credit conditions.
Most of them also saw "substantial downside risks to the economic outlook" and thought a second rate cut--after the half-point in September -- "would provide valuable additional insurance against an unexpectedly severe weakening in economic activity."
The one exception to that "nearly all" was Kansas City Federal Reserve Bank President Thomas Hoenig who voted for no change. He believed "inflation risks appeared elevated," felt that the Fed funds rate, then at 4.75 pct, was "close to neutral." The minutes said Hoenig thought monetary policy should be "slightly firm to better hold inflation in check."
Despite the FOMC's description of the risks to growth and inflation as balanced in its post-meeting statement, the minutes show somewhat less concern about inflation than about growth.
Core inflation reports had been "generally favorable," and the FOMC "agreed that the recent moderation in core inflation would likely be sustained." Going forward, they thought inflation would "edge down over the next few years."
Nonetheless, the minutes said, "recent increases in the prices of energy and other commodities, along with the significant decline in the dollar," were clearly factors that could "exert upward pressure on prices of some core goods and services."
Several of the FOMC participants saw "some relapse in financial conditions" leading up to the meeting. The general view was that markets were "fragile" and the FOMC was "concerned that an adverse shock -- such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses -- could further dent investor confidence and significantly increase the downside risks to the economy."
Hoenig pointed out, according to the minutes, that the Fed could act as needed if new liquidity problems appeared in the financial markets, and "preferred to wait, watch and be ready to act depending on how events developed."
Though there was "scant evidence" of spillover effects from housing into the rest of the economy, Fed members were also worried about "notable declines" in consumer confidence.
They worried that falling home prices, rising gasoline prices and tighter credit could further sap consumer confidence and cause a bigger pullback in spending.
The FOMC saw the chance of "significant further weakening in housing activity and home prices." Tighter credit and a rise in foreclosures could intensify the downward pressure on house prices.

Fed Econ Forecasts Suggest Moderate Growth, Low Inflation

WASHINGTON (Dow Jones)--Federal Reserve officials generally expect a soft-landing scenario with moderate economic growth, stable inflation and low unemployment through 2010, though they acknowledged that greater uncertainty surrounds their growth forecasts. The forecasts, released for the first time Tuesday under the Fed's new quarterly release schedule and three-year forecast horizon, also suggest that officials have grown more pessimistic about the economy's ability to achieve the type of rapid, noninflationary growth that it did in the late 1990s and early this decade. They also signal that officials have an informal inflation goal of a little less than 2% over the medium term. Federal Open Market Committee members lowered their 2008 gross domestic product growth forecast to between 1.8% and 2.5% from their previous forecast in June of 2.5% to 2.75%, the Fed said Tuesday. That downward revision "stemmed from a number of factors, including the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than- expected housing data, and rising oil prices," the Fed said in a statement accompanying its forecasts. FOMC forecasts used to be released twice a year with a two-year horizon. They are presented as a central tendency, meaning the highest three and lowest three of FOMC members' forecasts were excluded. The range of GDP forecasts for next year varied widely, from 1.6% to 2.6%. "The dispersion of participants' projections for growth next year seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market, the effect of financial market disruptions on real activity outside of the housing sector, and the speed with which financial markets will return to more normal functioning," the Fed said. The FOMC sees GDP this year up 2.4% or 2.5%, suggesting that after robust growth in the second and third quarters, officials foresee a marked slowdown this quarter to only around 1.5%. The Fed expects GDP to grow between 2.3% and 2.7% in 2009 and 2.5% to 2.6% in 2010. Wall Street economists are eying the 2010 forecasts as a proxy for how fast the Fed thinks the economy can grow over the long run without boosting inflation. Growth in the 2.5% to 2.6% range is well below previous estimates of the economy's growth potential that once exceeded 3%. Indeed, even growth in the mid-2% range should keep the unemployment rate below 5%, according to the Fed's forecasts, another indication that officials think the growth potential is lower now. Inflation is expected to stay under wraps, with the Fed's preferred inflation gauge - the price index for personal consumption expenditures excluding food and energy - rising between 1.8% and 1.9% this year and 1.7% to 1.9% in 2008. Both of those forecasts were lower than in June. Officials expect core inflation to hover between 1.7% and 1.9% in 2009 and 1.6% to 1.9% in 2010. As is the case with GDP, the Fed's 2010 inflation forecasts will be viewed by Wall Street as an unofficial inflation target. "Participants' projections further out were also influenced by their views about the rate of inflation consistent with the Federal Reserve's dual mandate," the Fed stated. Annual core PCE growth is currently within that 1.6% to 1.9% range, at 1.8% through September. Officials also expect headline PCE to be between 1.6% and 1.9% in 2010, though headline PCE is expected to top the core this year and next as energy prices remain elevated.

Dollar gives up previous gains

NEW YORK (AP) - The dollar lost some gains made the previous day as traders tried to figure out Tuesday whether another interest rate cut was in the works.
The dollar resumed its skid against the euro, as the 13-nation currency rose as high as $1.4633 before settling back to $1.4596 in late afternoon trading.
The euro still traded above the $1.4554 it was worth in New York late Monday, when it lost more than a cent as investors, wary of market turmoil, backed away from investing in high-yielding currencies.
The dollar also fell against the pound, as the British currency rose to $2.0674 from $2.0595.
The dollar climbed to 110.69 yen from 110.05 yen, but fell to 1.1265 Swiss francs from 1.1282 Swiss francs Monday.
Meanwhile, the Canadian dollar edged up to $1.0373 Tuesday from $1.0368.
The dollar is suffering from speculation that the U.S. Federal Reserve, which recently cut interest rates twice, may keep doing so even as its major European counterparts and the Bank of Japan have left interest rates unchanged.
Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.

Treasurys lower as stocks mend

NEW YORK (AP) - Treasury prices dropped Tuesday as investors sought bargains in a stock market that has been badly bruised in recent weeks by credit and economic worries.
Although stocks have been out of favor of late, better-than-expected earnings news from Wal-Mart Stores Inc. and lower oil prices emboldened investors to venture back into that market. There was mild selling of Treasurys to free up funds for a boisterous stocks rally that at one point sent the Dow Jones industrial average more than 200 points higher.
"This is all just a reaction to the stock market," said Alan Tedford, fixed-income portfolio manager at Stephens Capital.
The benchmark 10-year Treasury note fell 14/32 to 99 30/32 with a yield of 4.26 percent, up from 4.22 percent late Friday. Prices and yields move in opposite directions. The bond market was closed for Veterans Day on Monday.
The 30-year long bond was unchanged at 106 10/32 with a yield of 4.61 percent, also unchanged from late Friday.
The 2-year note lost 8/32 to 100 6/32 with a yield of 3.53 percent, up from 3.42 percent late Friday.
The yield on the 3-month note rose to 3.47 percent from 3.27 percent and the discount rate increased to 3.39 percent from 3.19 percent Friday.
After the close of trade the National Association of Realtors said its pending home sales index, which tracks home sale contracts signed but not completed, rebounded 0.2 percent to 85.7 in September.
The improvement could be seen as an indication that housing sales may be set to rebound.
The Realtors' group, however, also forecast that existing home sales will decline to a five-year low in 2007, and said the outlook for 2008 is worsening. The housing crisis has put pressure on many asset classes, but it has helped build demand for Treasurys and other safer assets.
The corporate bond market recovered Tuesday alongside the stock market. In recent weeks, the two markets have moved in lockstep and both were under severe pressure last week. However, on Tuesday there were a number of new corporate bond offerings for such companies as United Healthcare Inc. FIServe Inc., Potomac Electric and others.
The bond market remains focused on learning the extent of damage to the economy done by weakness in housing and the credit markets. These problems have stirred extremely strong demand for assets like Treasurys, which are perceived as safe because they carry a government guarantee.
Stephens Capital's Tedford said the market's focus could switch to inflation later this week. The Labor Department's October producer and consumer price reports are due Wednesday and Thursday. Both are expected to show large gains in headline inflation due to the soaring oil price.
If the gains in inflation are very large, they will put pressure on the Federal Reserve not to cut interest rates further, following cuts totaling 0.75 percentage point in September and October. Investors are hoping for further rate cuts to stimulate capital markets.
Earlier the Treasury Department said it ran a $55.6 billion deficit in October, the start of the government's fiscal year.

Canada Afternoon: C$ Up Moderately As Risk Aversion Subsides

TORONTO (Dow Jones)--The Canadian dollar ended moderately higher, but well off its earlier highs, Tuesday as investors became less concerned about risk, and the U.S. dollar retreated against several major currencies. The U.S. dollar was trading at C$0.9637 at 3:41 p.m. EST (2041 GMT), from C$0.9540 at 8:00 a.m. EST (1300 GMT), and from C$0.9669 late Monday. The U.S. dollar slumped as low as C$0.9527 in overnight dealings but regained considerable ground in North American activity. Some of the Canadian dollar's recovery Tuesday from lows touched in illiquid trading during the Remembrance Day holiday Monday resulted from a return to more normal trading conditions, market watchers said. "To an extent, it reflects the return of full trading desks and the unwinding of some of the volatility from yesterday," said David Watt, senior currency strategist at RBC Capital Markets. "Yesterday, it was like the yen had its day, and the U.S. dollar had its day. But the fundamentals under the yen remain abysmal, and the fundamentals under the U.S. dollar remain abysmal," Watt said. "It didn't take much to tilt the balance back towards carry trades and the cyclically sensitive currencies." On Tuesday morning, senior Canadian finance official said Canada has borne the brunt of the U.S. dollar's adjustment as the latter weakens against global currencies. Canadian Finance Minister Jim Flaherty will deliver that message to his G-20 counterparts and central bank governors when they meet in Cape Town, South Africa this weekend, the official said at a briefing, speaking on condition of anonymity. Some market watchers said those remarks contributing to selling pressure on the Canadian during in morning trading. RBC's Watt said the Canadian dollar is prone to underperform other currencies in the coming sessions if oil prices continue their retreat. "That's been one of the big things that's supported the Canadian dollar recently is that, no matter what happened, oil seemed to be surging towards $100. That seems to be coming off, to an extent," he said. But underperformance against other non-U.S. dollar currencies could be perfectly acceptable to Canadian authorities in the context of the finance official's comments Tuesday. "Given Canada's newfound concern about China and the Canadian dollar carrying bearing the burden of global imbalances, it's not a thing the Bank of Canada or the Canadian government are going to be terribly upset with, right now," Watt said. The Canadian currency's short term direction closely tied to oil prices, and overall perceptions of risk among global financial markets players, he said. Investors appear to be questioning the extent to which Canada can decouple from the U.S. economy, he added. "To an extent, it's like people don't have their blinders are now. They are exposed to both sides of the argument about the Canadian dollar," Watt said. "We could still do better over the next few days, but I don't think we're going to shoot the lights out," he said. There were no significant data releases Tuesday. On Wednesday, the leading indicator for October and new motor vehicle sales for September will be released. These are the exchange rates at 3:41 p.m. EST (2041 GMT), 8:00 a.m. EST (1300 GMT), and late Monday.

USD/CAD 0.9637 0.9540 0.9669
EUR/CAD 1.4054 1.3931 1.4068
CAD/JPY 115.14 115.39 113.80

Mexico's Peso Closes Stronger At MXN10.8640/Dlr; IPC Rallies

MEXICO CITY (Dow Jones)--Mexico's peso closed sharply stronger Tuesday as the local IPC stock index rallied. The peso was quoted in Mexico City as closing at MXN10.8640 to the U.S. dollar, compared with MXN10.9010 at the open and MXN10.9125 at Monday's close. The peso rallied as investors bought local currency to go bargain hunting in the local stock market. The IPC was trading 4.1% higher Tuesday after four consecutive days of losses. Expectations of weaker economic growth in the U.S. during the fourth quarter and 2008 have weighed on Mexico's financial markets in recent weeks. But Tuesday the Dow Jones Industrial Average also was trading higher, helping the local currency and stock market. The U.S. is Mexico's largest trade partner, and local financial markets often track sentiment in the U.S. There was also demand for government debt in the local bond market, pushing yields lower. The yield on 10-year bonds due in 2016 fell three basis points to 7.95%. The yield on 20-year government bonds due 2024 fell three basis points to 8%. The results of the Bank of Mexico's weekly debt auction were mixed. The yield on one-month Treasury bills, or Cetes, dropped to 7.41%, after falling 0.02 percentage point last week. The yield on 91-day Cetes rose 0.04 percentage point to 7.61%, while the yield on 175-day Cetes rose 0.03 percentage point to 7.71%.