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September 5, 2007
Beige Book
The latest Beige Book is out, and it will not add any fuel to the fires of those expecting a rate cut.
Here's how it begins...
Reports from the Federal Reserve Districts indicate that economic activity has continued to expand. St. Louis and Kansas City described the pace of activity as moderate; Cleveland, Chicago and Minneapolis said their economies were expanding at a modest rate; and Boston and Atlanta reported that activity was mixed. New York cited continued expansion. The economies in Philadelphia, Richmond, Dallas, and San Francisco continued to grow; however, the pace of activity has slowed.
Most Banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around. While several Banks noted that commercial real estate markets had also experienced somewhat tighter credit conditions, a number commented that credit availability and credit quality remained good for most consumer and business borrowers. Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.
In calculus terms, we might say that the first derivative of GDP is still positive, but the second derivative is negative. It's at times like this when honest minds can disagree about whether a rate cut really is warranted. But overall, the Beige Book does not lend a tremendous amount of support to those wanting a rate cut. Nor will it change very many minds of those who want a rate cut. In that sense, it's not much that we didn't know. However, it is very important to consider how this will affect those who will actually be voting at the FOMC meeting in a couple weeks. Given that Chairman Bernanke recently stated that the Fed would be closely watching the incoming data, this would lead one to expect that the Chairman and those in his camp will see this as justification for holding the line for at least one more meeting.
That certainly seems like a reasonable interpretation, and if you read Reuters, you'd be led to the same conclusion.
NEW YORK (Reuters) - Stocks added to losses on Wednesday after the Federal Reserve's Beige Book summary of economic conditions suggested continued strength in the economy, reducing expectations for an interest rate cut.
Yet, the traders at the Chicago Board of Trade aren't buying it. 30 day fed funds and the binary options haven't budged.
There should be some interesting Fedspeak in the next few days. Maybe that will give us more clues.
The Wall Street Journal Real Time Economics Blog has more quotes from the Beige Book
Posted by William Polley at September 5, 2007 2:26 PM
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