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U.S. Manufacturing Data Down: Should The Fed Act?

Friday, 1 Dec 2006 | 11:18 AM ET

ISM Manufacturing Data was released this morning. The index fell to 49.5 for November--down from 51.2 in September and signifying a contraction in U.S. manufacturing. Construction spending dropped by the most in five years in October--sliding 1 percent.

Now eyes turn back to the Fed and how they'll react.

What if the Fed remains on hold for too long? Are we running the risk of recession if they don't starting cutting interest rates?

CNBC’s Liz Claman asked Diane Swonk--Chief Economist at Mesirow Financial and Nigel Gault who is Chief U.S. Economist at Global Insight.

ISM Index & the Fed
The ISM Index shows contraction in the manufacturing sector. Diane Swonk, Mesirow Financial Chief Economist; Nigel Gault, Global Insight Chief U.S. Economist; and CNBC's Liz Claman discuss how the Fed will react to the data.

Swonk says the bottom line is the Fed only controls credit conditions – for the Fed to ease rates you’d have to argue that we need more liquidity in the U.S. economy. Credit is not hard to get in this economy.

Swonk also says that one can argue the Fed might have over-stimulate--now causing a housing bust and the problems we’re facing are not easily fixed by moving interest rates

Nigel Gault says today is a soft number and is hoping for something better. Gault says the weakness in the economy is not just housing--it’s broader than that and in hindsight the monetary policy might have been too weak for too long

More from Gault: the Fed has to look at the outlook for growth next year and the likelihood that there will be some slack in the economy. Also, where is inflation going to go as a result and when it will be safe to bring interest rates down? Gault is not sure right now-- but he is looking for cuts next year sometime late 1Q or in the 2Q.

Immediately following the ISM numbers, the Dow was trading lower.