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Fed sees slower US growth amid market fallout

Economic concerns indicate it may cut rates again at next week’s meeting

SEATTLE – UNITED States Federal Reserve policymakers have given a sober assessment of the US economy, as renewed financial market turmoil cast a shadow on growth prospects.

Such views reinforced market expectations that the US central bank will cut short- term interest rates next week for a third consecutive time when its Federal Open Market Committee (FOMC) meets.

The Fed has cut its benchmark federal funds rate by a cumulative 75 basis points since mid-September to prevent economic fallout from market turmoil that originated with problems in the US mortgage market.

‘Since the October FOMC meeting, financial conditions have deteriorated and we have seen some unexpected softening in economic data,’ San Francisco Federal Reserve Bank president Janet Yellen said in a speech to business leaders in Seattle on Monday.

‘These developments necessitate some rethinking of my growth forecast and have highlighted the downside skew in the risks to that forecast,’ said Dr Yellen, a non- voting member this year on the Fed’s rate-setting committee.

Renewed credit concerns were the main focus of markets on Monday. Benchmark 10-year Treasury yields fell to 3.88 per cent, while stock markets retreated as financial shares sank.

After the October FOMC meeting, the Fed said the risks of slower growth were balanced with those of higher inflation, and subsequent remarks by various Fed policymakers had implied that the central bank did not see the need for further easing.

But last week, both Fed chairman Ben Bernanke and vice-chairman Donald Kohn said that renewed financial turmoil may have a larger adverse effect on the economy, signalling that downside risks had increased.

The Fed will hold its next policy meeting next Tuesday.

Dr Yellen echoed Mr Bernanke and Dr Kohn, saying the outlook was particularly uncertain now due to financial conditions.

‘Developments have been fast-moving,’ she told reporters after the speech. ‘A lot of things have happened in financial markets.’

Boston Fed president Eric Rosengren, speaking in Boston, said the US economy will grow ‘well below’ potential in the coming quarters, and the foreclosure crisis plaguing the housing and banking sectors is likely to worsen.

Dr Rosengren, a voting member on the FOMC this year, did not elaborate further on the economy and focused most of his speech on sub-prime mortgage problems.

He said lenders and borrowers should work together to modify loans to avoid even greater pain for both sides.


Source: REUTERS (The Straits Times 5 Dec 07)


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