WASHINGTON — Though recent distress in financial markets has “deepened” the housing slump, the overall economy has seen little impact so far, the U.S. Federal Reserve said Wednesday.
That assessment, contained in the latest beige book, suggests that while a rate cut in two weeks may still be likely, officials may not see the same need for aggressive easing that financial markets expect, the Wall Street Journal reported.
“Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited,” according to the beige book — a summary of economic activity prepared for the Sept. 18 Federal Open Market Committee meeting. The survey period ended Aug. 27.
The Fed is widely expected to lower the federal-funds rate for the first time in more than four years at this month’s meeting, by a quarter percentage point to 5%. Last month, it cut the discount rate it charges banks that borrow directly from the Fed by 50 basis points to 5.75 percent.
But what happens after this month remains a question mark. Financial markets expect one percentage point in fed-funds rate cuts by year end, and prominent economists including Harvard Professor Martin Feldstein have argued for that type of aggressive response to the housing slump.
Tighter lending standards as a result of financial strains were “having a noticeable effect on housing activity,” which “added to uncertainty about when the housing market might turn around,” according to the beige book, which was prepared by the Cleveland Fed.
Most Fed banks report sales activity and prices as either flat or falling.
Still, “a number [of district Fed banks] commented that credit availability and credit quality remained good for most consumer and business borrowers,” the Fed said, and commercial real estate “was generally stable to expanding.”
The beige book isn’t usually considered among the highest tier of economic indicators. But it has taken on heightened importance after Fed Chairman Ben Bernanke’s speech in Jackson Hole, Wyo., on Friday in which he said, “we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts.”
Other economic numbers that probably fall in the “timeliest” category do suggest downside economic risks have intensified somewhat.
The National Association of Realtors’ pending home sales index, a leading indicator of sales, plunged 12.2% in July. Meanwhile, jobless claims have risen in recent weeks, and a report Wednesday from Automatic Data Processing Inc. and Macroeconomic Advisers estimated that only 38,000 private-sector jobs were created last month.
Other reports on manufacturing sentiment and automobile sales for August suggest, however, that there is some measure of support for the economy despite the housing slump, so it doesn’t appear to be headed toward recession.
According to the beige book, consumer spending saw “modest to moderate increases,” while automobile sales were “slow or subdued” in most regions.
Most Fed district banks reported “at least modest” gains in employment, the beige book said, while wage increases remained “moderate or steady.” There was “little change” in overall price pressures, the Fed said.
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