FED board is more in crisis control mode

FED board is more in crisis control mode
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First Published: Sat, Feb 02 2008. 01 27 AM IST
Updated: Sat, Feb 02 2008. 01 27 AM IST
Fears of a recession in the US have been fanned by the fourth quarter’s weak 0.6% annualized growth rate. But consumer spending did not falter. The US slowdown is still largely confined to housing and to housing-related finance.
The slow growth came largely from contraction of just two components of the gross domestic product (GDP). Residential investment tumbled by an annualized 24%, subtracting 1.2 percentage points from the overall growth rate. The huge drop follows seven consecutive quarters of shrinkage. That reflects the home builders’ rational response to the glut of homes on the market.
If housing demand had not fallen, US GDP would have grown by a respectable 3.2% in 2007. The profound recession in housing dragged growth down to 2.2%—the lowest in five years.
Elsewhere, however, there are few signs of recession. Companies slashed their inventories in the fourth quarter, perhaps in fear of recession, and thereby subtracted another percentage point from the quarter’s growth. But consumer spending is holding up. It rose at a 2% rate in the fourth quarter—with spending on durable goods growing at a 4.2% rate. True, the Philadelphia Federal Index for January was very weak and unemployment has risen. But the Automatic Data Processing Inc.’s jobs report released on Tuesday correlates with a 130,000 increase in private payrolls in January—far higher than had been expected.
Consumer spending would, of course, falter if unemployment rises further. Recession would then be inevitable. But policymakers are now going all out to ward off that threat. The George W. Bush administration’s $150 billion (Rs5.91 trillion) fiscal stimulus plan will put money in consumers’ hands. And the Fed’s extraordinary one-and-a-quarter percentage point cut in the overnight interest rate takes the short-term interest rate below the inflation rate.
The stimulus is huge and runs the risk of stoking inflation. But that seems to be a distant concern for the Fed. It wants to keep the housing blow-up from doing too much collateral damage, for example dragging down the monoline insurers of municipal bonds. In other words, the central bank is willing to risk its inflation-fighting credentials to keep the US economic weakness literally in-house.
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First Published: Sat, Feb 02 2008. 01 27 AM IST
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