Markets, Fed Still at Odds Over Outlook for Economy
The U.S. Federal Reserve and financial markets seem to be sharply at odds over where the
economy and interest rates are heading, and fresh Fed forecasts to be released Tuesday are unlikely to bridge that gap.
Fed policy-makers have indicated they expect the economy to claw its way back to relative health at some point next year, and that the current setting of interest rates is likely well
positioned to help it to do so.
More detailed and extensive forecasts to be released by the U.S. central bank Tuesday are likely to underscore that view.
But many financial market participants and some top economists expect the persistent housing slump, cooler spending and continued turmoil in financial markets to weigh more heavily on the economy, perhaps even triggering a recession.
"Confirm the Divergences"
"The new forecasts will not converge but rather confirm the divergences that there are between the markets and the Fed," said Michael Feroli, economist at JPMorgan in New York.
Prices for U.S. government debt rose in a safe-haven bid on Monday as stocks fell on credit
concerns and traders raised bets on interest-rate cuts.
Since mid-September, the Fed has lowered the benchmark federal funds rate by a cumulative three-quarters of a percentage point to prevent economic fallout from financial turmoil sparked by losses in the U.S. subprime mortgage market.
The target for overnight rates now stands at 4.5 percent.
Futures markets have moved to price in a near certainty of another quarter-point reduction at the next Fed meeting on Dec. 11, a 64 percent implied chance of a cut to 4 percent in
January, and about a 28 percent chance of a cut to 3.75 percent in March.
Harvard University professor Martin Feldstein, who said in late August the Fed would have to ease by a full percentage point, said Monday the central bank would have to lower rates by at least another quarter-point in December and more next year to stave off a recession.
"Fed Has to Move"
"The Fed has to move the federal funds rate to some number beginning with 3, not 4," he said at the Council on Foreign Relations, adding that downside economic risks were larger now
than they had appeared in August.
Wall Street also has been reassessing its view, and appears to be moving further away from the Fed, not closer to it.