Friday, November 23, 2007

Fed Minutes: Do Not Expect Another Cut on 12/11

The recent Fed meeting minuted were released today and for those counting on another rate cut in 3 weeks, you might want to rethink that.

From the Meeting:
"In their discussion of individual sectors of the econ-omy, participants noted that the recent declines in housing activity—while substantial—had largely been anticipated. Nonetheless, the potential for significant further weakening in housing activity and home prices represented a downside risk to the economic outlook. Most participants pointed to the deterioration in non-prime mortgage markets as well as higher interest rates and tighter credit standards for prime nonconforming mortgages as factors that had exacerbated the deterio-ration in housing markets, and they noted that these developments could further limit the availability of mortgage credit and depress the demand for housing.

Some participants also pointed to downside risks to the housing market stemming from the large volume of substantial upward interest-rate resets that were likely on subprime mortgages in coming quarters, which could lead to a faster pace of foreclosures in the near term, thereby intensifying the downward pressure on house prices. Participants generally agreed that the available data suggested that consumer spending had been well main-tained over the past several months and that spillovers from the strains in the housing market had apparently been quite limited to date. Nevertheless, a number of participants cited notable declines in survey measures of consumer confidence since the onset of financial turbulence in mid-summer, along with sharply higher oil prices, declines in house prices, and tighter under-writing standards for home equity loans and some types of consumer loans, as factors likely to restrain con-sumer spending going forward.

Moreover, anecdotal reports by business contacts suggested a softening in retail sales in some regions of the country. Participants expressed a concern that larger-than-expected declines in house prices could further sap consumer confidence as well as net worth, causing a pullback in consumer spending. All told, however, participants envisioned that the most likely scenario was for consumer spend-ing to continue to advance at a moderate rate in com-ing quarters, supported by the generally strong labor market and further gains in real personal income. Meeting participants noted that capital expenditures had grown at a solid pace in recent months and that the financial turmoil generally appeared to have had a limited effect on business capital spending plans to date. Nevertheless, business sentiment appeared to have eroded somewhat amid heightened economic and financial uncertainty, potentially restraining investment outlays in some industries.

However, participants noted that conditions in corporate bond markets had improved since the September FOMC meeting, and that credit availability generally appeared to be ample, albeit on somewhat tighter terms. Participants judged that moderate growth of investment outlays going for-ward was the most likely outcome. A number of par-ticipants saw downside risk to the outlook for nonresidential building activity, reflecting elevated spreads on commercial-mortgage-backed securities and a further tightening of banks’ lending standards for commercial real estate loans.

Data on economic growth outside the United States indicated that the global expansion, though likely to slow somewhat in coming quarters, was nevertheless on a firm footing. The continued strength of global growth and the recent decline in the foreign exchange value of the dollar were seen as likely to support U.S. exports going forward. Readings on core inflation received during the inter-meeting period continued to be generally favorable, and meeting participants agreed that the recent moderation in core inflation would likely be sustained.

The slower pace of economic expansion anticipated for the next few quarters would help ease inflationary pressures. Nonetheless, participants expressed concern about the upside risks to the outlook for inflation. The recent increases in the prices of energy and other commodities, along with the significant decline in the foreign exchange value of the dollar, were cited as factors that could exert upward pressure on prices of some core goods and services in the near term. Increases in unit labor costs also could add to inflationary pressures.

Moreover, participants expressed concern that some measures of inflation compensation calculated from TIPS securities had risen this year, although they viewed inflation expectations generally as remaining contained. Participants were concerned that if headline inflation remained above core measures for a sustained period, then longer-term inflation expectations could move higher, a development that could lead to greater inflation pressures over the longer term and be costly to reverse."

Energy prices have to eventually find their way into the CPI number and when they do, any chance of a rate cut is zero. What the Fed may choose to do instead rather than have their hands tied when that eventually happens is keep rates where they are now to force a mild slowdown and let that take the pressure off oil demand and thus its impact on consumers. This then leaves them the flexibility they want down the road should growth slow dramatically to cut rates to spur it.

Bank stocks like Citigroup (C), Bank of America (BAC), Wachovia (WB) and Wells Fargo (WFC) may get hit again on the news but they are all in fine shape and any additional selling will be a great chance to pick up more cheap.

The only way I see another rate cut in December is if there is another dramatic shock to the system. Barring that count on the status quo..

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