Beige Book, Kohn Point to Cut

Slowing growth and 'tightening' financial conditions boost hope for the Fed to ease.
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The

Federal Reserve

delivered a double dose of rate-cut medicine to the markets Wednesday.

Hope for rate cuts to come spurred a strong stock market rally -- and the financial sector -- after a dovish morning

speech by Fed Vice Chairman Donald Kohn, and the Fed's beige book, released in the afternoon, depicted a buckling economy in need of support.

The beige book, which surveys economic conditions between meetings of the rate-setting Federal Open Market Committee, noted that in October through mid-November, seven of the Fed's 12 districts reported slower growth.

The report, combined with Kohn's comments that included concerns that recent credit market "turbulence" could "increase the possibility of further tightening in financial conditions for households and businesses," left the markets reassured the Fed will step in with deeper rate cuts that may help stave off a recession. Rate-cut hopes also helped offset news of more bank writedowns, as

Wells Fargo

(WFC) - Get Report

, often considered conservative, revealed a $1.4 billion fourth-quarter hit on late Tuesday.

This beige book reported some new weaknesses in the U.S. economy. In particular, retail spending was "soft" in many districts, read the report, and most retailers "were expecting a slow holiday season." The housing situation remained dim, "keeping downward pressure on prices and construction activity."

That's not such a surprise, but the Fed noted that commercial real estate activity, which many economists have held up as an example of resilience in the economy, "showed signs of leveling off" in some areas. Banks exhibited lower levels of commercial and industrial loans.

"The notion of slowing economic activity dominates nearly every section of the beige book," writes Tony Crescenzi, fixed-income strategist at Miller Tabak and contributor to

RealMoney.com

. "Of particular concern are reports of slowing in job growth and consumer spending. These are forces that once in motion can become self-reinforcing."

The Fed has cut overnight lending rates by a total of 75 basis points at its last two meetings, taking the fed funds target rate down to 4.50%. A number of officials, including Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans on Tuesday, have recently hinted that additional easing isn't a guarantee, especially as long as they consider inflation a threat.

Seems like the regional Fed officials are playing bad cop, while the top Fed officials play good cop to the markets. Next up is Chairman Ben Bernanke, who speaks Thursday evening in South Carolina.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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