NEW YORK (Reuters) - The Federal Reserve on Wednesday cut its forecast for economic growth in 2008 and warned of higher inflation and unemployment but also signaled it was unlikely to cut interest rates again soon.
Federal Reserve economic forecasts
KEY POINTS: * “Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term,” the Fed said in minutes of its April 29-30 meeting. * In an accompanying forecast, the Fed cut its projection for economic growth to scant 0.3 percent to 1.2 percent in 2008, down from 1.3 percent to 2 percent it estimated three months ago. * The central bank said it expects inflation to remain “elevated” and unemployment to increase “significantly.”
JOHN CANAVAN, ANALYST, STONE AND MCCARTHY RESEARCH ASSOCIATES,
“The Treasury market didn’t react directly to the Fed minutes. The minutes were rather hawkish. The idea that the April rate cut, itself, was a close call got a lot of attention and that sent equities tumbling lower and the ensuing risk aversion bid due to the equity sell-off lifted Treasuries off of the lows.”
CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW
“I think they are reasonably dovish. They did say it was a close call. I think that is their way of signaling that they are pausing.
“They did lower their growth forecasts and just going through the minutes all the discussion on growth is pretty downbeat. On the whole it is bullish for the bond market. They continue to stress downside risks to growth.
“They are talking about upside risks to inflation but that is par for the course. Relative to the hawkish Fed rhetoric we’ve heard in the last couple of weeks, this is a lot more balanced I would say. So there is a bit of relief in the bond market on this.”
“On the Fed’s forecasts: for the rest of 2008 they have increased their inflation expectations, but by their 2009 and 2010 numbers it looks as if they are viewing inflation as being transitory.
“They are looking for weaker growth initially, but for it to pick up to better levels as you enter into 2009.
“(The Fed’s) expectations are for growth to remain weak over the next six months.
“Front end yields are trending a little bit lower.
“The Treasury market is for the most part anticipating slow growth and concerns on inflation. Those two measures which have been the tug of war all along remain the concern of the Fed.”
RICK MECKLER, PRESIDENT, LIBERTYVIEW CAPITAL MANAGEMENT, JERSEY
“Basically, (the Fed’s) starting to signal to the market that easy rate cuts are done.
“I think (stocks are) turning on the fact you won’t have easy money to support the market... But I think to some extent that’s the gut reaction that investors always have. That rate cuts are good, no rate cuts are bad, and when they have more time to reflect on it, I think if they feel the Fed is being balanced, the market will recover from this.
(Another rate cut?) “I think it’s possible. One thing it does raise the stakes on, is that if there are more rate cuts, it’s going to imply that things are materially worse. It raises the stakes all around.”
CHRISTOPHER LOW, CHIEF ECONOMIST, FTN FINANCIAL, NEW YORK
“The growth forecast is not that much weaker except for 2008. Bernanke had told us it would be a more V-shape profile.”
“If you had any doubt that the Fed is signaling a pause, that doubt is gone. The key was that it was a close call to cut rates at all in April.”
“Growth and inflation risks are essentially balanced. I don’t see anything here that says they are in a hurry to ease again.”
MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS LLC, GREENWICH,
The lowering of the 2008 growth forecast “shouldn’t be surprising to anyone. The bond market had already totally priced out further rate cuts, and was looking for rates to start to drift up modestly. So that’s not new news.”
On the Fed’s inflation view he said: “Food and energy prices have been exploding and headline inflation has been high so that shouldn’t be new news either. It sort of looks like it’s just a knee jerk reaction in the equity markets. This is not new news.”
“Equity markets are being sold off but I’m a bit puzzled as to why the bond market is selling off on their saying that the decision to cut rates was a close call and that more people are concerned about inflation risks. Their take on inflation becoming slightly more of an issue may be supporting the dollar a little bit here, as it probably reinforces futures pricing in a rate hike later this year, but the reaction has been slight. But their saying that home prices could decline by more than expected and pose big risks to growth and jobs is pretty bearish.”
“The combination of the Fed minutes and ECB’s (Christian) Noyer’s remarks gave the dollar a bit of a lift in afternoon trading. The Fed minutes showed the last rate cut was a close call and that the central bank is worried with higher inflation, that paves the way for a possible rate hike by the end of the year. At the same time, the ECB is out there being very vocal about volatility in the currency markets with the euro at these levels.”
MARKET REACTION: * BONDS: U.S. Treasury debt prices pare losses * CURRENCIES: U.S. dollar pares losses against the euro * STOCKS: U.S. equity indexes extend losses, Dow drops more than 1 percent * RATE FUTURES: U.S. short-term interest rate futures were unchanged, pricing in a 12 percent probability of a 25 basis point rate cut at the Fed’s June meeting.