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Two Fed presidents indicate an end to interest rate cuts

Two Federal Reserve district bank presidents signaled they’re not prepared to back an interest-rate cut even after the biggest disruption to the US financial industry in seven decades.

“Lowering the rate right now maybe isn’t the right response” because of an “inflation problem,” St Louis Fed President James Bullard said after a speech in Bloomington, Indiana, late on Thursday.

Thomas Hoenig, his Kansas City counterpart, said in Albuquerque, New Mexico, that “there is very strong stimulus in the economy” already.

The remarks underscore a gap between investors’ expectations of further rate reductions and the sentiment among some regional Fed officials that more interest rate cuts may not aid the economy at a time of elevated inflation.

Five of the 12 district-bank chiefs dissented on rate decisions since policy makers started lowering borrowing costs in September last year.

Traders may look to Fed chairman Ben Bernanke’s Oct. 7 speech on the economy for clues on whether the Federal Open Market Committee is open to a cut even before its Oct. 28 to Oct. 29 meeting. Bullard and Hoenig aren’t voters on the FOMC this year.

Hoenig said the Fed’s challenge would be to take back some of the seven rate cuts implemented from September of last year to April this year, while Bullard stressed his concern about inflation dangers. Both Bullard and Hoenig said the financial crisis is taking its toll on the US economy.

“The things that have given me the most concern are the labor market data and the sharp rise in the unemployment rate” and jobless compensation claims that are “at recession levels,” Bullard said.

Meanwhile, the IMF said on Thursday that the US is set for a sharp economic downturn or recession judging by the impact of similar banking crises around the globe over the past 30 years.

In new research, the IMF said the risk of a recession is higher when financial turmoil is preceded by rising house prices and rapid expansion of credit, which was the case in the US.

“The patterns of asset prices, aggregate credit and house borrowing in the United States during the current episode of financial stress appear similar to those of previous episodes that were followed by recessions,” IMF research found.

“It is now all too clear we are seeing the most dangerous shock to mature financial markets since the 1930s, posing a major threat to global growth,” Charles Collyns, deputy director in the IMF’s research department, told reporters.

He said so far the US economy has slowed but not entered into recession — at least through the second quarter — but risks identified in the research showed it could still enter one.
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