Fed Sees Continued Expansion

The beige book report is no slam-dunk for the rate-cut camp.
Author:
Publish date:

Stocks sold off anew Wednesday after the latest report from the Federal Reserve suggested that a Sept. 18 fed funds rate cut is far from a sure thing.

The Fed's beige book report -- an update on the state of the U.S. economy by geographic district, from July 25 through Aug. 27 -- said most regions were still reporting economic expansion, though some described it as moderate or mixed.

The comments weighed on stock investors, who have been banking on a cut in the fed funds rate that governs overnight bank loans. The

Dow Jones Industrial Average

, which has been lower all day, fell further after the report. It recently showed a 192-point decline at 2:30 p.m. EST, just half an hour after the report's release.

The report comes less than a week after Fed Chairman Ben Bernanke signaled in a speech that the central bank's policy-setting arm is closely watching the timeliest economic indicators to make sure the economy isn't headed for a fall.

But investors fear that by standing pat on the fed funds rate, the Federal Reserve could cause a recession. Some believe the Fed, by keeping the funds rate at 5.25%, risks allowing a credit crunch that has weighed on the financial sector to spread into the real economy.

The credit crunch has already wrought havoc on mortgage industry players such as

Thornburg

(TMA)

and

Countrywide

(CFC)

and on big brokers such as

Bear Stearns

(BSC)

and

Lehman Brothers

(BSC)

.

So far, though, the Fed is signaling that it sees little evidence for those fears.

"Outside of real estate, reports that the turmoil in the financial markets had affected economic activity during the survey period were limited," read the beige book.

Banks reported tighter lending standards in the residential mortgage space, as housing sales and prices continue to move lower. But credit availability and credit quality for consumers and businesses remained good, according to the report.

Manufacturing activity expanded in most areas, but there was softer demand for building materials and autos.

And the report noted that "nearly every District reported at least modest increases in employment during the recent survey period." Some still described the labor market as "tight." Wage increases were "moderate or steady," with most districts reporting no great price pressures. Some regions reported higher food and restaurant prices.

In the service sector, regions reported "strong gains" in financial, health care, technology, technical and professional services, which fits with Wednesday's ADP National Employment report, which reflected job growth in the service sector, and job losses in the goods producing sector. The ADP report said the economy added just 38,000 new jobs, exluding government jobs, in the month of August.

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

here

to send her an email.