Fed Chief Likely to Remain Stingy With Rate Cuts
By: Neither Resler, Brusca nor Ramirez are forecasting a recession, although they admit is a very close call at this point. Other economists--including those at Merrill Lynch and Goldman Sachs – say a recession is imminent and inevitable with a decline in GDP starting in December, when retail sales fell after a stronger-than-expected showing in November.
Industrial production data released Wednesday showed activity was unchanged in December -- many forecasts called for a decline, another recession indicator.
All About The Credit Crunch
Long-time Fed watcher David Jones is unequivocal about it. He says the economy fell into recession in December and will emerge from it in July, if the Fed takes aggressive steps.
“The worsening credit situation feeds into weakening economy and then vice versa,” says Jones, president of DMJ Advisors. "It becomes very difficult to turn it around. I think we are in one and I think we are in a recession. If you let it accumulate we will have a deep recession.”
Citigroup’s dreadful fourth-quarter earnings and laundry list of credit crunch woes, Merrill Lynch’s $27-plus billion in exposure to subprime and CDOs and Countrywide’s fire sale acquisitionby Bank of America and Wells Fargo's firstquarterly profit loss in six years lend some credence to Jones’ claim that the credit crunch “is the worst financial crisis since WW II.”
Jones is among a relatively small group of private sector economists who says an intra-rate meeting cut is appropriate because the Fed “is in the confidence business as much as in the credit business.”
He expects a 50-basis point reduction at the January meeting, followed by three quarter-point cuts in the coming months, bringing the federal funds rate down to 3 percent by the spring. The FOMC’s next two meetings are March 18 and April 29-30.
Three percent appears to be the magic number for many market watchers and players, including PIMCO boss Bill Gross, which is 225 basis points above where the Fed started when it first cut rates Sept. 18.
The Fed may not be alone in its fight. Congressional leaders, presidential hopefuls and President Bush are talking about a fiscal stimulus package, which could range between $70 billion and $100 billion. Bernanke had indicated he is open to such a package.
That said, even if consensus emerges, it then becomes a question of whether the legislation can be enacted – and its measures implemented -- fast enough to make any difference in the economy.
Jones, for one, isn’t quibbling about the timing. “My feeling is that you have to throw everyone at it.”
