Fed Sees A Blue Christmas as Growth Slows

The economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season.

The Fed Reserve's new snapshot, released Wednesday, suggested that the strains from a severe housing slump and a painful credit crunch are affecting the behavior of individuals and businesses alike -- making them somewhat more cautious.

"Reports on retail spending were downbeat in general," the Fed survey said. "Most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year," the Fed added.

Spending by consumers and businesses is the lifeblood of the country's economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.

The Fed report found that the national economy continued to grow during the survey period of October through mid-November but at a "reduced pace." Of the 12 Fed regions surveyed, seven reported a slower pace of economic activity, while the remainder generally pointed to "modest expansion or mixed conditions," the Fed said.

The findings will figure prominently into discussions when Federal Reserve Chairman Ben Bernanke and his colleagues meet on Dec. 11 to decide their next move on interest rates. Investors and some economists believe the Fed will slice rates for a third time this year in light of a fresh spell of turbulence on Wall Street. That turmoil reflects fears that the housing and credit problems could push the economy into recession.

However, the hope of additional rate cuts gave Wall Street a big lift on Wednesday. The Dow Jones industrial surged more than 200 points.

Fed Governor Donald Kohn, in a speech Wednesday, warned that if the financial turmoil seen in recent weeks were to persist, it could further crimp the flow of credit to people and businesses, raising risks to economic growth.

Kohn, the No. 2 official at the Fed, said the recent gyrations on Wall Street "partly reversed some of the improvement in market functioning" seen in late September and in October. The credit crunch had taken a turn for the worse in August, causing stocks to nosedive.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York. Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed stock prices and could induce lenders and other financial companies "to adopt a more defensive posture in granting credit, not only for house purchases but for other uses as well," Kohn warned.

Against the backdrop of such uncertainty about how forces will play out with consumers and businesses, Kohn once again said Federal Reserve policymakers must remain "nimble." In his view, "these uncertainties require flexible and pragmatic policymaking," Kohn said.

Wall Street viewed Kohn's comments as hinting that additional rate cuts could be forthcoming.

The Fed has sliced interest rates twice this year -- in September and late October -- to keep the housing collapse and credit crunch from throwing the economy into a recession. Fed policymakers at the October meeting signaled that further rate reductions may not be needed to help the economy through its rough spots. Since then, however, financial markets have suffered through another period of turmoil.