Japan's Economic Growth Rebounds on Consumer Spending (Update6)

By Lily Nonomiya
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Nov. 13 (Bloomberg) -- Japan's economy grew faster than economists forecast in the third quarter as an unexpected increase in consumer spending countered a drop in housing construction.

The world's second-largest economy expanded an annualized 2.6 percent in the three months ended Sept. 30 after a revised 1.6 percent contraction in the previous period, the Cabinet Office said in Tokyo today. The median estimate of 41 economists surveyed by Bloomberg News was for a 1.8 percent increase.

The Bank of Japan kept its benchmark interest rate at 0.5 percent today as the biggest drop in housing investment in a decade and slowing shipments overseas threaten the expansion. Bond yields fell to the lowest since January 2006 on speculation that a cooling global economy will reduce demand for exports, the main driver of growth.

``The chances of a year-end rate increase are dwindling with domestic demand so weak and the risks for the U.S. economy growing,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The report underscores how export-reliant the economy is.''

Net exports, or the difference between exports and imports, contributed 0.4 percentage point to growth. Domestic demand added 0.2 percentage point.

The yield on the benchmark 10-year bond fell 2.5 basis points to 1.49 percent at 4:59 p.m. in Tokyo. The yen traded at 110.11 per dollar from 109.63 before the report was released.

Second-Quarter Revision

From the previous quarter the economy grew 0.6 percent, more than the 0.5 percent forecast by economists. The second- quarter contraction was larger than the annualized 1.2 percent estimated in September.

The yen has risen more than 4 percent against the dollar this month, eroding earnings at exporters. Federal Reserve Chairman Ben S. Bernanke said last week that that growth in the world's largest economy will ``slow noticeably'' this quarter.

Export growth is already waning. Shipments overseas grew at the slowest pace in two years in September.

``We can't rule out the risk that the U.S. economy will deteriorate more than expected,'' Bank of Japan Governor Toshihiko Fukui said after the rate decision today.

The U.S. economy, Japan's biggest market, is expected to expand at a 1.5 percent annual pace in the fourth quarter, less than half that of the third quarter, economists surveyed this month said.

Consumer Spending

Consumer spending, accounting for more than half of Japan's economy, grew 0.3 percent from 0.2 percent in the second quarter. Outlays by households are at risk because wages fell in nine of the 10 months to September and unemployment rose to 4 percent from 3.6 percent two months earlier.

``Consumer spending isn't that strong yet,'' Japan's Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo today. ``It is still weak enough that it can be affected by bad weather because wage growth has stalled.''

Investment in housing fell 7.8 percent from the second quarter after the government enforced stricter rules for building permits in response to a 2005 scandal involving faked earthquake-engineering data.

The Bank of Japan last month cut its economic growth forecast for the year ending March 31 to 1.8 percent from 2.1 percent, in part because of the drop in construction.

Housing Starts

``Bottlenecks from kinks in the new building standards system have yet to be resolved,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. Lower housing construction may depress gross domestic product into the first quarter of next year, he said.

The Topix Construction Index of 103 companies has slumped more than a fifth in the past three months, making it the worst performer of the 33 groups in the broader Topix index, which slumped 11 percent in the same period. The fallout has spread to other industries as well.

Toto Ltd., a bathroom fixtures company, cut its full-year profit forecast by 25 percent last month after the rule change caused a drop in demand from customers outfitting new homes.

``It usually takes about three months for housing starts to affect us so we're starting to see the impact this quarter,'' said Kenji Matsumoto, spokesman at the Fukuoka-based company. ``The decline in starts has been so large that we had to revise our full-year forecasts.''

The GDP deflator, a broad gauge of prices, fell 0.3 percent, matching analysts' predictions.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

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U.S. Economy: Consumer Spending Increases in August (Update1)

By Joe Richter


Sept. 28 (Bloomberg) -- Consumer spending in the U.S. rose more than forecast in August, suggesting Americans are as yet undeterred by a softening labor market and higher borrowing costs.

The 0.6 percent rise in spending was the biggest in four months and followed a 0.4 percent increase in July, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled, while the National Association of Purchasing Management-Chicago said business activity unexpectedly picked up.

Purchases of autos and furniture surprised most economists, signaling that the economy may be able to keep expanding this year even as confidence takes a hit from the jump in credit expenses during August. Smaller price increases give Fed policy makers room to cut interest rates again should a deepening housing slump threaten a broader slowdown.

``The overall data point to an economy that is weathering the credit crisis quite well,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the gain in spending. ``So far, the turbulence in the credit markets and the housing markets has not spread over to the broader economy.''

The National Association of Purchasing Management-Chicago's index of business activity rose to 54.2 in September, from 53.8 the previous month. The Reuters/University of Michigan measure of consumer confidence was 83.4 this month, remaining at the lowest level in a year. Construction spending unexpectedly rose in August, led by factories, hotels and offices, another Commerce Department report showed.

`Still Positive'

``The current Fed policy abets a flight path of lower but still positive growth, with moderate inflation,'' Atlanta Fed President Dennis Lockhart said in a speech today at Middle Tennessee State University in Murfreesboro, Tennessee. ``More turbulence may be ahead.''

Treasuries were little changed. The yield on the benchmark 10-year note rose 1 basis point to 4.58 percent at 3:08 p.m. in New York.

Incomes increased 0.3 percent in August after 0.5 percent, today's report also showed. Income was forecast to rise 0.4 percent, according to the Bloomberg News survey median.

Economists forecast spending, which makes up more than two- thirds of the economy, would rise 0.4 percent for a second month, according to the median of 76 estimates in the Bloomberg survey.

Easing Inflation

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, increased 0.1 percent in August for a sixth consecutive month. It was up 1.8 percent from August 2006, the smallest gain since February 2004.

Some Fed policy makers, including Ben S. Bernanke before becoming chairman, have said they'd prefer core inflation within a 1 percent to 2 percent range.

Adjusted for inflation, spending also rose 0.6 percent in August, the most since October, after a 0.3 percent gain the prior month, the report showed.

Because the increase in spending was larger than the gain in incomes, the savings rate fell to 0.7 percent, from 0.9 percent the prior month.

Disposable income, or the money left over after taxes, increased 0.4 percent after rising 0.6 percent.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, jumped 2.8 percent. Purchases of non-durable goods were little changed and spending on services, which includes utilities and accounts for almost 60 percent of all outlays, climbed 0.6 percent.

Wage Gains

A decline in confidence hasn't translated into a collapse in spending, which makes up more than two-thirds of the economy. So far, wage gains helped shield consumers from the effects of a worsening real-estate recession.

The economy's underlying resilience, along with future Fed actions, ``should they be desirable,'' will most likely keep the economy ``on a track of moderate average growth and gradually declining inflation over the next few years,'' Fed Bank of St. Louis President William Poole said in a speech in New York today.

Retail sales in August rose 0.3 percent after a 0.5 percent gain the prior month, according to a Commerce Department report Sept. 14. Receipts at automobile dealerships and parts stores rose the most since July 2006, the report showed.

Union, New Jersey-based Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, this week said second-quarter profit rose more than analysts estimated after it lowered prices to lure in customers.

Dim Outlook

Economists foresee lower sales by year-end. The economy lost jobs last month for the first time in four years and defaults among subprime borrowers have jumped, prompting banks to boost borrowing rates and make it more difficult to get loans. Home- price declines also mean fewer owners can tap into equity for extra cash.

A Sept. 25 report from the International Council of Shopping Centers and UBS Securities LLC showed retail sales at stores open at least a year fell 1 percent last week from the previous week, the second straight decline. Lowe's Cos. and Target Corp. this week cut their earnings forecasts.

Consumer spending will probably grow at a 2.25 percent average annual pace in the second half of 2007, compared with a 2.55 percent rate from January through June, based on the median in a Bloomberg survey of economists Aug. 30 to Sept. 7. Quarterly gains averaged 3.7 percent in the last decade.

The economy will grow 2 percent this year, the least since 2002, according to the Bloomberg survey.

Pound Drops for Fourth Week as Northern Rock Worsens Sentiment

By Gavin Finch and Anchalee Worrachate

Sept. 29 (Bloomberg) -- The pound dropped for a fourth week against the euro after the Financial Times reported that Northern Rock Plc had been forced to borrow a further 5 billion pounds ($10 billion) to stay in business.

The U.K. currency traded near the lowest in more than 2 1/2 years yesterday, posting its worst quarterly performance since March 2003, as an Organization for Economic Cooperation and Development report showed a real-estate slump may be crimping the wider economy. Interest-rate futures suggested there's a greater chance than a month ago that the Bank of England will cut interest rates from 5.75 percent.

The Northern Rock loan ``indicates there are still reasons to be cautious on the outlook for risk,'' said Kamal Sharma, a London-based currency strategist at Bank of America Corp. ``We're not out of the woods yet.''

The pound traded at 69.79 pence per euro by 4:10 p.m. in London yesterday, near the lowest since January 2005, and down from 69.75 pence at the end of previous week.

It fell almost 4 percent this quarter against the common European currency.

``There is now a risk that growth will be weaker going forward, which could imply a need for interest-rate reductions,'' the Paris-based OECD said this week in its economic outlook. ``The interest-rate increases over the last year, together with recent financial-market volatility, are expected to slow the housing market'' in the U.K.

The U.K. currency rose to $2.0379 yesterday, from $2.0203 a week before. It's advanced against the dollar for the past seven quarters.

Dollar Weakness

The dollar fell against 14 of the 16 most-traded currencies tracked by Bloomberg this quarter on speculation losses on subprime mortgages are having a worse effect on the U.S. than on many other countries.

The pound was also hurt against the euro after a report on behalf of the European Commission yesterday showed U.K. consumer confidence fell to a six-month low in September.

Gilts advanced yesterday as investors sought the relative safety of government debt. The yield on the two-year note fell 10 basis points to 5.04 percent. The price of the 4 percent security due March 2009 rose 0.14, or 1.4 pounds per 1,000-pound ($2,032) face amount, to 98.58.

The 10-year gilt yield dropped 5 basis points to 5.01 percent. U.K. bonds also advanced this quarter as U.S. subprime losses spread.

The implied rate on the December interest-rate futures contract fell 7 basis points yesterday and 14 basis points in the past month to 6.07 percent. That's its second monthly decline this quarter.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 16 basis points more than the benchmark rate, currently 5.75 percent, over the past decade.

Japan Trade Surplus Surges on Exports of Autos, Steel (Update2)

By Lily Nonomiya


Sept. 26 (Bloomberg) -- Japan's August trade surplus was three times higher than economists predicted as car and steel shipments jumped and import growth slowed.

Exports rose at more than twice the pace of imports, the Finance Ministry said in Tokyo today, increasing the surplus to 743.2 billion yen ($6.5 billion). The median estimate of 37 economists surveyed by Bloomberg News was for the gap to swell 23 percent from a year earlier to 235.5 billion yen.

Shipments to Europe and Asia rose to records for the month, and may help Japan weather a slowdown in the U.S., the country's largest overseas market. The International Monetary Fund said this week that global economic growth will probably cool next year because of a credit shortage triggered by the collapse of the U.S. subprime mortgage market.

``Export growth was quite high,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. ``Still, slower global growth is a risk that needs to be watched closely as well as the impact of the subprime issue.''

The yen traded at 114.71 per dollar at 10:14 a.m. in Tokyo from 114.57 before the report was published.

Exports climbed 14.5 percent in August, faster than July's 11.8 percent, the ministry said. Economists expected growth in shipments to cool to 10.9 percent. Import growth slowed to 5.7 percent, a third of the pace of the previous month.

U.S., Europe

Shipments to the U.S. advanced 4.6 percent in August, accelerating from 1.3 percent. Exports to the European Union climbed 15.6 percent, faster than July's 13.1 percent. Growth in exports to China quickened to 23.8 percent from 20.6 percent.

``Demand in other regions, particularly Asia and Europe, is solid,'' Junko Sakuyama, a senior economist at Dai-Ichi Life Research Institute Inc. in Tokyo.

Honda Motor Co., Japan's second-largest carmaker, said sales in China surged 44 percent in July from a year earlier. For the first seven months of 2007, the company's sales surged 32 percent.

Canon Inc., Japan's most profitable office-equipment maker, said last month that sales in India rose 50 percent in the first half of 2007 as higher wages buoyed demand for digital cameras and copiers.

Until today, reports had signaled that Japan's economy was losing steam. Gross domestic product contracted at the fastest pace in more than three years in the second quarter as companies cut capital outlays. Wages had their biggest drop since 2004 in July, making it unlikely consumers will be able to drive growth should exports falter.

`Very Concerned'

Toyota Motor Corp., Japan's largest automaker, said U.S. auto sales slipped 2.8 percent last month as the subprime mortgage crisis hurt consumer sentiment. Analysts expect sales in the U.S. to slow this year as loans have become more costly and hard to obtain because of the credit squeeze.

``This is not just a problem about the housing market but also about people borrowing from finance companies to buy cars,'' Yoshio Ishizaka, a senior adviser to Toyota's board, said in an interview on Sept. 6. ``I am very concerned.''

IMF managing director Rodrigo de Rato said this week that global economic growth will probably be ``slightly less'' next year than in 2006 and 2007. ``We see no early resolution to the credit problems,'' he said. ``It's a serious crisis.''

U.S. Economy: Consumer Confidence Slumps, Home Sales Decline

By Shobhana Chandra and Bob Willis


Sept. 25 (Bloomberg) -- Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board's index of consumer confidence fell more than forecast in September, to 99.8 from 105.6. The National Association of Realtors said August sales of previously owned houses dropped 4.3 percent and a separate index of home values fell the most in at least six years in July.

``These numbers will encourage the Fed to cut rates again,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The recession in housing is continuing, home prices are still falling and that's going to eat into housing wealth and home-equity extraction. The net result is we'll see sluggish consumer spending into 2008.''

Traders increased expectations that the Fed will lower borrowing costs twice more this year, interest-rate futures showed. Policy makers reduced their benchmark by half a point last week, aiming to forestall a broader economic slump.

Futures prices on the Chicago Board of Trade indicated a 70 percent likelihood the Fed will reduce its main rate to 4.25 percent, from 4.75 percent, by year-end. The odds rose from 52 percent yesterday.

The consumer confidence index was the lowest since November 2005. The reading was forecast to fall to 104.3, from an originally reported August reading of 105, according to the median estimate in a Bloomberg News survey of 71 economists. Projections ranged from 100 to 107.

Home Sales

Purchases of existing homes fell to an annual rate of 5.5 million, the fewest since August 2002, the agents' group said in Washington. Sales dropped 13 percent compared with a year earlier and median home prices rose 0.2 percent to $224,500.

Home prices in 20 U.S. metropolitan areas fell 3.9 percent in the 12 months through July, according to the S&P/Case-Shiller home-price index, which was also released today. The drop was the biggest since record keeping began in 2001, indicating the threat to consumer spending was rising even before credit markets seized up in August.

Sales are likely to keep falling after borrowing costs rose and mortgages became more difficult to get last month. The number of properties on the market rose to a record in August.

``Housing is weak, it's taking a bit of a toll on consumer spending, and consumer psychology is obviously following that down,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``While the holiday shopping season is still months away, it is probably going to be weaker than we've seen in many years.''

Properties for Sale

As lenders make it tougher to get loans following a surge in subprime mortgage defaults, the number of unsold properties on the market has risen, pulling prices lower.

The supply of homes for sale at the end of the month rose to 4.58 million, the most ever. At the current sales pace, that represented 10 months' worth, the highest since record keeping began in 1999 and up from 9.5 months' at the end of August.

Existing homes account for about 85 percent of the market and sales of new homes make up the rest. The report on new-home purchases, which are calculated based on signings and are considered a more timely indicator, is due from the Commerce Department on Sept. 26.

Sweeter Incentives

With inventories rising, homebuilders are sweetening incentives to close sales. Hovnanian Enterprises Inc., the biggest homebuilder in New Jersey, Sept. 14 began offering discounts worth as much as $150,000. The company held a three-day sale in 18 states including California, New Jersey, New York, Arizona, Ohio and Illinois, that led to 2,100 contract signings.

Buyers are ``hesitant to purchase,'' Chief Executive Officer Ara Hovnanian said last week at a conference in New York. ``The trend is slowly trying to get back to recovery.''

Lennar Corp., the largest U.S. homebuilder, today reported the biggest quarterly loss in its 53-year history after $848 million of costs to write down the value of real estate.

The Conference Board's measure of present conditions fell to 121.7 from 130.1 in August.

``Usually this component tracks labor market conditions, so this is a potentially significant move,'' wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, in a report to clients.

The share of consumers who said jobs are plentiful decreased to 25.7 percent from 27.5 percent in August. The proportion of people who said jobs are hard to get increased to 22.1 percent from 19.7 percent.

While job losses at construction and mortgage-related firms have risen recently, reports suggest businesses in other industries are retaining their staff until there's more evidence the economic slowdown will deepen, economists said.

The number of Americans filing claims for jobless benefits fell in the week ended Sept. 15 to the lowest level in almost two months, the Labor Department reported last week. The number of people continuing to collect state unemployment benefits plunged by the most since May.

Fed Lowers Rate to 4.75 Percent, First Cut Since 2003 (Update6)

By Scott Lanman and Craig Torres

Sept. 18 (Bloomberg) -- The Federal Reserve lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years, to protect the U.S. from sinking into a recession sparked by fallout from the housing-market collapse.

``Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the Federal Open Market Committee said in a statement after meeting today in Washington. The central bank will ``act as needed to foster price stability and sustainable economic growth.''

Stocks surged, two-year Treasury notes rose and the dollar fell to a record low against the euro. The larger-than-forecast reduction suggests Chairman Ben S. Bernanke is prepared to leave himself open to criticism that he's rescuing investors from bad decisions for the sake of saving the six-year expansion.

``You forget about everything else, and you have to make sure the worst-case doesn't happen,'' said Stephen Cecchetti, a former New York Fed research director who is now a professor at Brandeis University in Waltham, Massachusetts. ``This is very forward-looking.''

Core inflation has improved ``modestly'' this year, while some risks remain, the Fed said. The decision was unanimous.

``Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction, and to restrain economic growth more generally,'' the FOMC said.

Adhering to Schedule

The decision is also a sign that policy makers don't want to cut rates between their regular meetings, Cecchetti said. Policy makers next gather Oct. 30-31. Traders repeatedly speculated on an unscheduled rate announcement in the past month.

The federal funds rate, which banks charge each other for loans, had stood at 5.25 percent since June 2006. That's when the Fed ended a two-year run of increases that lifted the rate from a four-decade low of 1 percent.

Most economists anticipated a quarter-point, and traders had pared bets on a bigger move in recent days as some Fed officials signaled they would be reluctant to back a half-point cut.

``Clearly they are trying to be preemptive,'' said Paul Kasriel, chief economist at Northern Trust Co. in Chicago and a former Fed economist. At the same time, the inflation language suggests that officials are ``trying to increase their options at upcoming meetings,'' he said.

Discount Rate

The Fed's Board of Governors also lowered the rate on direct loans to banks by half a percentage point to 5.25 percent.

The Fed first reduced the so-called discount rate by a half point on Aug. 17 in a surprise move to restore confidence after some companies found it hard to obtain funds as investors fled riskier assets. The credit crunch was caused by losses in securities tied to subprime mortgages.

It was the first time in almost five years that the Fed move differed from analysts' predictions. The half-point reduction in the federal funds target was forecast by 23 of 134 economists surveyed by Bloomberg News. One hundred and five predicted a reduction of 25 basis points, while six forecast no change. A basis point is one-hundredth of a percentage point.

The Standard & Poor's 500 Index climbed 2.9 percent, the biggest gain since March 2003. The Fed last cut the federal funds target in June 2003, to 1 percent from 1.25 percent. Meantime, crude oil climbed to a record and gold and copper surged.

Traders expect the Fed to reduce the benchmark rate to 4.25 percent by the end of 2007, compared with a forecast of 4.5 percent yesterday, based on futures prices.

Protecting Lenders

Today's move suggests Bernanke's comment on Aug. 31 that it's not the Fed's responsibility ``to protect lenders and investors from the consequences of their financial decisions'' may be little more than talk for now, said Neal Soss, chief economist at Credit Suisse in New York.

``This concern about moral hazard is a whole lot easier to preach than it is to implement,'' said Soss. ``It's very hard to administer tough love.''

Investors began anticipating a reduction on Aug. 9, a week before the Fed made the initial discount-rate cut and said risks to growth have ``increased appreciably.'' Two weeks later, Bernanke said in a speech that the central bank would ``act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.''

Shifting Focus

Policy makers were forced to shift their focus to growth from inflation in August as rising defaults on subprime mortgages rippled through global credit markets. Asset-backed commercial paper contracted by the most in at least seven years and Countrywide Financial Corp., the biggest U.S. mortgage company, was shut out of the market.

The decision comes two days before Bernanke faces lawmakers in a House Financial Services Committee hearing on the mortgage- market crisis. Representative Barney Frank, the Massachusetts Democrat who heads the panel, on Sept. 7 called for a ``meaningful'' rate cut by the Fed.

Today, Frank said he was ``pleased'' with the rate reduction yet ``surprised'' that, in his judgment, the Fed's ``continued concern about inflationary risk outweighs what I believe to be growing risks to sustained growth.''

Separately, House Speaker Nancy Pelosi said the Fed move ``underscores the economic insecurity that middle-class Americans have long been feeling.'' The California Democrat said in a statement that she hopes the rate cut ``will bring some relief to the middle class.''

Economic reports show that the deepening recession in housing is taking a toll on the broader economy. The Labor Department said Sept. 7 that employers cut 4,000 workers in August. Job growth has been slowing since June, Atlanta Fed President Dennis Lockhart acknowledged. August figures for retail sales and industrial production were below economists' forecasts.

Highlighting Risks

Officials including Fed Governor Frederic Mishkin and San Francisco Fed President Janet Yellen highlighted the risks to spending in speeches this month. Teams of Fed economists also ran what-if scenarios to supplement the central forecast given to the FOMC members today.

Inflation has also receded. The Fed's preferred price gauge, which excludes food and energy costs, rose 1.9 percent from a year earlier in July, within the 1 percent to 2 percent comfort range stated by several officials. The Labor Department said today that producer prices fell 1.4 percent in August, more than economists predicted.

Policy makers including Philadelphia Fed President Charles Plosser and Richard Fisher of the Dallas Fed signaled they were less likely to support a half-point cut this month. Plosser said Sept. 8 that he had not made up his mind on rates. Neither has a vote on the FOMC this year.

``Lowering the funds rate overall doesn't boost housing,'' said Lee Hoskins, a former Cleveland Fed president and now senior fellow at the Pacific Research Institute in San Francisco. ``All this does is delay the day in which these wealth losses will finally be worked out in the marketplace, so I don't regard this as a particularly good move.''

U.S. Federal Open Market Committee Statement: Text

By Washington newsroom +1-202-624-1820

Sept. 18 (Bloomberg) -- The following is the full text of the statement released today by the Federal Reserve:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4 3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Charles L. Evans; William Poole; Eric S. Rosengren; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50 basis point decrease in the discount rate to 5 1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City and San Francisco.

U.S. Producer Price Index Drops More Than Forecast (Update3)

By Courtney Schlisserman

Sept. 18 (Bloomberg) -- Prices paid to U.S. producers fell more than forecast in August, diminishing concern over inflation as the Federal Reserve considers lowering interest rates. The 1.4 percent decrease, the biggest since October, followed a 0.6 percent increase in July, the Labor Department said today in Washington. So-called core prices, which exclude fuel and food costs, rose 0.2 percent after a 0.1 percent gain the month before.

Slower inflation gives policy makers more room to cut their benchmark rate today in an effort to sustain the expansion in the face of a housing recession. A drop in fuel expenses pushed prices down in August and slacker economic growth will continue to restrain raw-material costs, economists said.

The Fed ``can point to reasonably good news on inflation,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York, who accurately forecast the core rate. ``The weakness in the economy is making it difficult for companies to pass along increases. That bodes very well'' for inflation in coming months, he said.

The producer-price report is the second of three monthly inflation gauges. The government said on Sept. 14 that import prices dropped 0.3 percent in August, the first decline in seven months. Figures for consumer prices will be issued tomorrow.

Central Bank `Luxury'

``There is little residual inflation pressure in the U.S. economy,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``The fact that most measures of core inflation have shown tame readings as of late gives the Fed the luxury of cutting rates aggressively if need be.''

The Fed cut the rate on loans to banks on Aug. 17 as global stock markets slumped on concern damage from rising mortgage defaults was spreading. At the time, policy makers dropped language indicating their bias toward fighting inflation and instead highlighted a rising threat to economic growth.

The Federal Open Market Committee will announce its decision at about 2:15 p.m. in Washington.

The yield on U.S. Treasury securities rose following the report. The yield on the benchmark 10-year note was 4.49 percent at 9:45 a.m., compared with 4.47 percent late yesterday.

Exceeding Estimates

Economists forecast producer prices would decline 0.3 percent after a 0.6 percent increase, according to the median of 76 projections in a Bloomberg News survey. Core prices were expected to rise 0.1 percent.

Over the past 12 months, producer prices rose 2.2 percent, down from a 4 percent increase in July. The year-over-year increase in costs excluding food and energy also eased to 2.2 percent compared with 2.3 percent in July.

A separate report from the Treasury Department showed foreign buying of U.S. securities slowed in July to the weakest pace in seven months as a rout in the subprime mortgage market sapped demand for American bonds.

Total holdings of equities, notes and bonds rose a net $19.2 billion, from a revised $97.3 billion in June.

Economists almost universally forecast the Fed will cut the benchmark overnight lending rate between banks for the first time since 2003. The median calls for a quarter-point cut to 5 percent.

Energy Expenses

The drop in wholesale prices last month was led by a 6.6 percent decline in energy costs that was the biggest since April 2003. Costs for gasoline, natural gas, heating oil and diesel fuel all fell.

Costs of intermediate goods, such as steel used in earlier stages of production, fell 1.2 percent in August, after a 0.6 percent increase the prior month. They were up 2.4 percent from a year ago.

Excluding food and energy, intermediate prices fell 0.5 percent and were up 2.4 percent from August 2006.

Prices for raw materials, or so-called crude goods, dropped 3 percent.

The cost of consumer goods fell 1.8 percent as food charges fell and prices for capital goods rose 0.1 percent.

Faced with the prospect of an economic slowdown, some companies are lowering prices to stoke demand ahead of the key holiday-spending season in the last three months of the year. Apple Inc. Chief Executive Officer Steve Jobs earlier this month cut the price of the iPhone by $200 to boost sales. The calendar fourth quarter and the back-to-school season that just ended are Apple's two busiest periods.

Price Increases

Others are suffering from increases in commodity costs and are boosting prices as a result.

``We've already raised prices and have more planned,'' Sara Lee Corp. Chief Executive Officer Brenda Barnes told analysts last week. ``We are certainly facing these headwinds of increased commodity costs, some of them at unprecedented levels, like wheat.''

Sara Lee fell $10 million short of covering the jump in raw-material costs, even after raising prices on bread and coffee, Barnes said.

Bernanke Weighs Recession Risk Against Bailout Charge (Update2)

By Steve Matthews

Sept. 18 (Bloomberg) -- The Federal Reserve will probably cut its benchmark interest rate today for the first time in four years, seeking insurance against a recession. The main question is how big a policy Chairman Ben S. Bernanke is ready to buy.

While a quarter-point reduction in the federal funds rate may not be enough to bolster growth and investor confidence, a half-point cut might fan inflation and be perceived as giving in to pressure from Wall Street firms that made bad bets, especially in the market for securities backed by subprime mortgages.

Bernanke and fellow policy makers ``are really caught,'' said Robert Eisenbeis, a former research director at the Fed's bank in Atlanta who attended meetings of the rate-setting Federal Open Market Committee before retiring early this year. ``The Fed needs to avoid the perception of bailing out the markets, lenders or borrowers.''

The FOMC will opt today for a quarter-point cut to 5 percent in the rate that banks charge each other for overnight loans, according to the median prediction of 134 economists surveyed by Bloomberg News. Twenty-three of the forecasters projected a half-point move, which traders think is coming sooner or later: Interest-rate futures indicate a rate of 4.5 percent by year-end. The decision is scheduled for about 2:15 p.m. in Washington. The gathering convened at 8:30 a.m.

Most-Analyzed Statement

Whatever today's decision, the statement accompanying it may be the most-analyzed in years. Reports portray a weakening economy: The Labor Department said Sept. 7 that that the U.S. last month suffered its first job losses since 2003. Investors will look for hints of further cuts -- such as a pledge to act as needed to safeguard the six-year expansion -- or language that plays down the risk of higher inflation.

``The markets will be disappointed by 25 basis points,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``If they do more now, they may be more cautiously optimistic in the statement. If they do 25 basis points, they will commit to doing more. You can argue it either way for which is the more powerful.''

The Fed's decision today will come hours after a government report that showed wholesale prices fell 1.4 percent in August, more than forecast. The Consumer Price Index is released tomorrow. As recently as the last FOMC meeting Aug. 7, officials said inflation was the ``predominant'' risk to the U.S. economy.

Just 10 days later, the Fed acknowledged that ``downside risks to growth have increased appreciably'' and pledged to ``act as needed.'' Policy makers will probably use similar language today, economists said.

`A Considerable Amount'

``The statement will point to the growth rate as the predominant policy influence and give the market the flexibility to price in a considerable amount of easing,'' said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former Fed economist.

Bernanke, 53, and his team may take additional steps to increase liquidity, including lowering the discount rate --which the fed charges on loans it makes to banks -- or altering terms for collateral used for loans from the central bank, economists said.

In their public comments, Fed officials have diverged in their assessments of risks to growth, making today's meeting particularly tough for analysts to handicap.

Since the August jobs report, Fed Governor Frederic Mishkin and San Francisco Fed President Janet Yellen have highlighted threats to consumer spending. By contrast, Fed bank Presidents Richard Fisher in Dallas and Charles Plosser in Philadelphia noted signs of resilience in the economy.

No Cave-In

At the same time, all agree the Fed doesn't want to be seen as caving in to funds that piled into the market for securities linked to subprime mortgages, those made to borrowers with poor or limited credit histories.

As defaults on such loans climbed, investors fled, making it tough for some companies to obtain credit; the market for asset-backed commercial paper shrank the most in at least seven years.

``It is not the responsibility of the Federal Reserve --nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming.

Anything seen as a bailout might increase ``moral hazard'' -- spurring investors to take on even more risk, comfortable in the belief the Fed will make good their losses.

Makes It `Worse'

``Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse,'' Jim Rogers, the chairman of Beeland Interests Inc. who predicted the start of the global commodities rally in 1999, said in an interview from Shanghai. ``The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.'' if the Fed injects too much liquidity, he said.

Former officials including Alice Rivlin, who was a Fed vice chairman under Bernanke's predecessor Alan Greenspan, have expressed regret over cutting rates three times in 1998. The economy continued to expand with little harm from turmoil in financial markets at the time, data later showed.

``The moral hazard argument is a powerful one,'' said Philip Orlando, who helps manage $260 billion as chief equity market strategist at Federated Investors Inc. in New York. As a result, he predicted, ``the market is wont to be disappointed'' by today's decision.

Others say policy makers will focus more on the recent economic data showing signs of a sputtering economy. Besides the decline in August payrolls, retail sales and industrial production rose less than forecast last month, and the Commerce Department may say tomorrow that builders broke ground on the fewest new homes since 1995.

Bernanke and fellow policy makers ``are trying to step away from the Greenspan model,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. ``But at the end of the day, they will act the same.''

U.K. Inflation Rate Falls to Lowest Since March 2006 (Update3)

By Brian Swint

Sept. 18 (Bloomberg) -- The U.K.'s inflation rate unexpectedly fell last month to the lowest level since March 2006, giving the Bank of England scope to reduce interest rates in response to any worsening of the credit-market rout.

Consumer prices rose 1.8 percent from a year earlier compared with 1.9 percent in July, the Office for National Statistics said today in London. Economists expected the rate to be unchanged, according to the median of 35 forecasts in a Bloomberg News survey. Inflation has slowed from a decade-high of 3.1 percent in March. Prices rose 0.4 percent compared with July.

The Bank of England, which signaled a month ago its benchmark interest rate may have to rise to curb inflation, is now facing an economy under threat from higher credit costs. Consumers are shouldering a record 1.3 trillion pounds ($2.6 trillion) in debt, a decade-long housing boom is cooling and the bank was last week forced to bail out mortgage lender Northern Rock Plc.

``The inflation picture has improved substantially over recent months,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``With the crisis in the financial markets persisting, interest rates may well be cut earlier in 2008 than we expect.''

To ease a surge in overnight borrowing costs, the Bank of England today made 4.4 billion pounds in emergency funds to U.K. banks. The London interbank offered rate that banks charge each other for overnight loans in pounds dropped 33 basis points to 6.47 percent after the move.

Slower Growth?

The collapse of subprime mortgages in the U.S. has prompted lenders to hold back on loans to all but the safest borrowers. Customers of Northern Rock, the U.K.'s third-largest home-loan provider, today queued for a fourth day to withdraw their savings.

Slower inflation means the Bank of England may have scope to cut its benchmark rate from 5.75 percent if the credit rout continues. The central bank said Sept. 6 it expects inflation to stay around its 2 percent target in coming months, and Governor Mervyn King said six days later the turmoil may curb consumer prices and hurt economic growth.

The housing market is also showing signs of slowing. London house prices dropped the most in three years this month, a report from Rightmove Plc on Sept. 14 showed.

Reductions in mortgage exit fees and clothing prices led the slowdown in inflation, the statistics office said. Financial services costs declined 3 percent from a year earlier and prices in the clothing and footwear category dropped 3.5 percent. Food and beverage costs climbed 3 percent and an increase in ticket prices for live music and theater also spurred inflation.

Off the Agenda

The pound declined and traded at $1.9909 at 12:30 p.m. in London compared with $1.9950 before the report.

``A rate rise is now off the agenda,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``Inflation numbers should be helpful for the next few months.''

The Bank of England has so far proved itself more reluctant than the European Central Bank or the U.S. Federal Reserve to take action against the market slump.

The Fed may cut its benchmark rate by a quarter percentage point to 5 percent later today, a Bloomberg News survey showed, and the ECB has held seven special cash auctions for banks since Aug. 9. The U.K. central bank announced its second such move today.

Investors have responded to the market slump by slashing forecasts for the bank's benchmark rate. The implied rate on the June futures contract was 5.55 percent today, down from 5.84 percent a month ago. The contract settles to the three-month London interbank offered rate for the pound.

Next Move

``I really struggle to find a reason why the Bank of England could possibly hike again,'' Rob Carnell, an economist at ING Wholesale Banking, said in an interview. ``The next move will be a rate cut.''

Bank of England policy makers are nevertheless still concerned economic growth will allow companies to raise prices. The economy will expand 2.9 percent in 2007, the most in three years, the International Monetary Fund predicted July 25.

The retail price index, a gauge used by labor unions when making wage demands, rose 4.1 percent in August from a year earlier, the statistics office said today.

Raw material costs are also rising. Oil prices climbed to a record $81.24 a barrel today and global wheat prices surpassed $9 a bushel for the first time last month.

Premier Foods Plc, the U.K.'s biggest producer of cakes and instant soup, said Sept. 4 it sees a ``substantial inflationary environment on food.''

Yields on U.K. inflation-protected bonds suggest traders expect inflation in Europe's second-largest economy to accelerate. The yield on inflation-indexed debt due in 30 years was 3.48 percentage points lower than that on 30-year gilts today, a gap that represents the rate of inflation investors expect over the life of the securities.

``There are a lot of upstream price pressures,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``But we see the bank lowering rates once the inflation risks are squeezed out.''

BOJ May Keep Rate Unchanged as GDP Shrinks, Abe Quits (Update1)

By Mayumi Otsuma

Sept. 14 (Bloomberg) -- The Bank of Japan will probably keep interest rates unchanged next week after Prime Minister Shinzo Abe resigned and the economy shrank in the second quarter.

Governor Toshihiko Fukui and his colleagues will leave the key overnight lending rate at 0.5 percent on Sept. 19, according to all 42 economists surveyed by Bloomberg News. The U.S. Federal Reserve is forecast to cut its benchmark rate from 5.25 percent the day before.

A period of political instability puts at risk the government's plan to raise revenue, cut spending, balance the budget by 2011 and beat lingering deflation. The central bank will also gauge the threat that the U.S. housing recession may spread to consumers and slow global growth.

``Japan's domestic politics provide an additional reason for the Bank of Japan to put a rate hike on hold,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, also citing concern U.S. growth may slow. He expects a rate increase in January at the earliest.

The central bank last February doubled its benchmark rate, still the lowest among major economies.

Abe, 52, resigned on Sept. 12 after failing to regain public support following his ruling party's defeat in the Upper House election in July.

The Liberal Democratic Party plans to choose a successor this month and the new party leader will become prime minister. The new leader will have to keep the economy from slumping and choose a new Bank of Japan governor in March.

`Everything's Delayed'

``Everything will be delayed, ranging from a rate hike, the appointment of a next central bank governor to economic reform,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo.

The Japanese economy shrank at an annualized 1.2 percent pace in the second quarter as businesses cut investment and consumers spent at about half the pace of the first quarter.

Core consumer prices, which exclude fresh food and is the key measure of inflation, slid 0.1 percent in August from a year earlier, the sixth monthly decline.

``There is no inflation, GDP shrank and the overseas environment is getting more uncertain,'' said Seiji Shiraishi, chief economist at HSBC Securities Japan in Tokyo. ``All this allows the Bank of Japan to take time to decide interest-rate policy.''

Some economists are concerned that a slowdown in the U.S may curtail demand for exports, leading to more spending cuts in Japan.

Machinery Orders

Other statistics suggest the economy may pick up. Machinery orders, which indicate business spending plans in three to six months, surged 17 percent in July, three times the pace forecast by economists.

The European Central Bank last week shelved a plan to raise rates. Economists expect the Fed to lower its key rate on Sept. 18 to revive growth after the economy lost jobs in August for the first time in four years.

``Given that Fed rate cuts may continue beyond September, we must assume the chance that the Bank of Japan will raise rates this year is diminished,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. He expects a rate increase in February.

The bank will announce its policy decision on Sept. 19, probably by early afternoon. It will publish a monthly economic assessment report at 3 p.m. Fukui will speak at a press conference at 3:30 p.m.

Greenspan Says He Failed to Foresee Subprime Rout (Update4)

By Craig Torres

Sept. 13 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he ``didn't really get'' how the boom in subprime lending might hurt the economy, and endorsed his successor's handling of recent market turmoil, CBS television reported.

Current Fed Chairman Ben S. Bernanke ``is doing an excellent job,'' Greenspan said in an interview on the 60 Minutes program, according to excerpts e-mailed by CBS today. The show is scheduled to air on Sept. 16, a day before the publication of Greenspan's book, ``The Age of Turbulence.''

The remarks come amid criticism among some investors that Bernanke has failed to be as forceful as his predecessor in responding to financial turmoil. Greenspan in 1998 cut interest rates three times after a Russian debt default rippled through global markets. Bernanke's Fed has refrained from lowering its benchmark so far, relying on other tools to provide liquidity.

``I'm not certain I would have done anything different'' than Bernanke, Greenspan said in the interview, according to excerpts released by CBS. ``I'm not sure that's true,'' Greenspan said when asked if he would act ``dramatically and quickly now.''

The former Fed chief, who led the central bank for 18 years, said inflation is a bigger concern now than when policy makers cut the target rate for overnight loans between banks in 1998, CBS said.

``We were dealing in an environment back there where inflation was easing,'' Greenspan said, according to the excerpts. ``We could have acted without the fear of stoking inflationary pressures. You can't do that anymore.''

`Vote of Confidence'

``Greenspan, given his significant legacy and stature, giving Bernanke an `atta-boy' in this environment is a positive boost for Bernanke,'' said William O'Donnell, head of U.S. rate strategy for UBS Securities LLC in Stamford, Connecticut. ``It's a nice vote of confidence for Bernanke going into next week's meeting.''

The Federal Open Market Committee will lower the benchmark rate by a quarter percentage point, to 5 percent, when it meets Sept. 18, according to the median forecast of economists surveyed by Bloomberg News.

As chairman, Greenspan won admiration for steering the economy through a series of crises, pumping out money to help growth rebound from a stock-market crash in 1987.

Housing Bubble

After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with Greenspan's hands-off approach to regulation, have brought him under fire as this year's bursting of the housing bubble and the subprime mortgage crisis again threaten to sink the broader economy.

Greenspan said in the interview that he was aware of lax lending standards in the subprime market, in which borrowers have little or poor credit history. The admission comes a week after the death of former Fed Governor Ed Gramlich, who had pushed Greenspan to strengthen the central bank's oversight of banks during the record U.S. mortgage boom from 2004 to 2006.

``While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,'' Greenspan said in the 60 Minutes interview. ``I really didn't get it until very late in 2005 and 2006,'' as he was about to leave office.

Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, said in a statement that ``Greenspan was one of smartest regulators this country ever had. If he missed it, then it should be a warning to the current regulators about the depth of this crisis.''

Gramlich's Push

Gramlich, who served from November 1997 until August 2005, urged Greenspan to examine the home-loan units of banks under the central bank's jurisdiction.

``It was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that,'' Greenspan said in the interview, CBS said.

Some economists and officials have blamed the housing bubble on the Greenspan Fed's rate reductions from 2001 to 2003. The former chairman rebutted that criticism, CBS said.

``It was our job to unfreeze the American banking system if we wanted the economy to function,'' Greenspan said. ``This required that we keep rates modestly low,'' he said.

Traders and economists expect the Fed will cut its benchmark rate by at least a quarter percentage point, the first reduction in four years, when policy makers meet on Sept. 18. Some investors and prominent analysts have said Bernanke should already have taken such action to reduce the threat of a recession.

``My judgment is there is enough of a risk that the Federal Reserve should be responding'' by cutting rates to reduce the chance of a recession, Harvard University economist Martin Feldstein, who heads the group that dates U.S. business cycles, said in an interview in Jackson Hole, Wyoming while attending a Fed conference last month.

Bernanke Spurns Greenspan's Quick Fix, Seeking Data (Update1)

By Craig Torres

Sept. 13 (Bloomberg) -- Alan Greenspan trusted his instincts. Ben Bernanke trusts the MAQS.

For the past several days, the MAQS -- a group of analysts in the Federal Reserve's Macroeconomic and Quantitative Studies unit -- have run a series of what-if scenarios on the U.S. economy that will play a critical role in next week's interest- rate decision.

The simulations will supplement the forecast handed to policy makers at the start of their Sept. 18 meeting and may determine the size of the rate cut almost universally predicted by Wall Street economists.

Bernanke has championed the team's work since becoming Fed chairman in 2006 because he wants to sift through models, projections and anecdotes before coming to conclusions. His approach contrasts with that of predecessor Alan Greenspan, who relied more on his own reading of conditions -- and as a result probably would have cut rates to insure against a recession long before the Sept. 18 Federal Open Market Committee gathering.

``Greenspan emphasized that, in response to a low- probability but high-cost outcome, the Fed should move aggressively,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``This Fed under Bernanke is more disciplined.''

The FOMC will next week lower the overnight lending rate between banks to 5 percent from 5.25 percent, according to the median forecast of economists surveyed by Bloomberg News. The reduction would be Bernanke's first and may be followed by at least two more before year-end, federal funds futures suggest.

Greenspan said Bernanke is doing ``an excellent job,'' according to excerpts from a CBS interview scheduled to air on the 60 Minutes program Sept. 16, a day before the publication of the former chairman's book, ``The Age of Turbulence.'' He added that he had ``no notion'' of the threat subprime lending posed to the overall economy ``until very late in 2005 and 2006,'' according to excerpts e-mailed by CBS today.

Subprime Reverberations

Calls for lower borrowing costs have been mounting since early August as the collapse of the subprime-mortgage market suddenly raised the cost of credit for companies and consumers. Pressure on Bernanke increased even more after a Labor Department report on Sept. 7 showed employers got rid of workers last month for the first time in four years.

Rather than resort to an emergency cut in the federal funds rate, Bernanke, 53, has waited for more data and a careful study of all the scenarios now under preparation by the staff.

The MAQS are in charge of the quantitative model of the U.S. economy known as FRB/US or ``Ferbus.'' By adjusting for such things as higher financing rates for American companies or a sharp decline in home prices, the team provides policy makers a glimpse of possible outcomes.

Staff Playbook

The scenarios -- known at the Fed as ``alt sims'' or alternative simulations -- are especially important at next week's meeting because the vote will likely be cast on the dangers that the forecast is better or worse than reported, former Fed officials said.

``The FOMC will start by looking at the standard calculation'' of how changes in home prices and credit spreads affect the outlook for employment and inflation, said Douglas Elmendorf, an assistant director of the Federal Reserve Board's research and statistics division from 2004 to 2007.

Policy makers will then ask, ```Where do we see the risks arrayed around the baseline?''' said Elmendorf, now a senior fellow at the Brookings Institution in Washington. ``Alternative simulations are quite important, particularly because of the Fed's announced interest in risk management.''

The methodical approach has some pining for the good old rapid-response days of Greenspan, who called six emergency rate meetings between 1992 and 2001. Five of those resulted in reductions as he sought to head off recession or ease gridlock in capital markets.

`Slow to Acknowledge'

Under Bernanke, ``the Federal Reserve has been very slow to acknowledge what is one of the biggest busts in U.S. housing history,'' said Allen Sinai, president of Decision Economics Inc. in New York. ``They've never even called it a recession.''

The distinction between Bernanke and Greenspan, 81, has roots in their different resumes and competing views about managing risk and uncertainty. Greenspan was a business economist before he became Fed chairman in 1987 -- one of his offices was on Wall Street -- and he read the economy like an income statement. His decisions were often based on close readings of disparate data, and his methods defied quantification. Greenspan's memoirs of his years at the Fed will be released on Sept. 17, the eve of the rate decision.

Bernanke, a former head of the economics department at Princeton University, has spent most of his career in academia. His analysis is based on models, and he has greater confidence in forecasts and statistical methods.

Snap Judgments

Over time, Greenspan's ``confidence in making snap judgments on less convincing evidence increased,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``Bernanke has a more balanced approach to decision making, which means you combine business-economist skills with anecdotes, high-frequency indicators, with models and simulation exercises.''

Both approaches have risks. Greenspan cited uncertainty as ``the defining characteristic'' of the monetary policy landscape in an August 2003 speech. ``Only a limited number of risks can be quantified with any confidence,'' he said.

The speech was critical of models, and elevated the role of judgment. He invoked theories of Frank Knight, a University of Chicago economist from 1927 to 1955, to explain his ideas of risk management.

Knight distinguished between risk and uncertainty: Risk is quantifiable, uncertainty is random. Managers ``would try to turn those uncertainties into knowable costs,'' said Ross Emmett, a professor at James Madison College at Michigan State who has edited a collection of Knight's essays. ``They would purchase insurance.''

Greenspan's Preference

Greenspan's preference for insurance was most visible in the third rate cut of 1998, and the aggressive easing from 2001 to 2003 to offset a ``minor'' probability of deflation.

Both those moves have been reassessed by Fed officials and private economists, who acknowledge that the rate cuts were too aggressive. To use Greenspan's framework, the Fed ``overpaid'' for insurance against risks that turned out to be less severe.

``We did use the fed funds rate, and that may have been a mistake,'' former Fed Vice Chairman Alice Rivlin, who voted for the 1998 rate cuts, said in an interview last month. Referring to the Bernanke Fed, she added: ``It might have been smarter to try what they are trying.''

The third cut of 1998 took the federal funds rate to 4.75 percent in a quarter when the economy grew at a 6.2 percent annual rate, according to revised data. In 1999, the Nasdaq Composite Index surged 86 percent, only to lose 39 percent the following year, and another 21 percent in 2001.

Bernanke's Vote

Bernanke, as a Fed governor, voted to keep the federal funds rate below consumer-price inflation for three years from 2002 to 2004. The result was a different bubble -- housing -- fueled by the biggest mortgage binge on record. Americans borrowed $2.8 trillion in home loans between 2004 and 2006.

``It was the Fed's own lax monetary policy that permitted the problem to arise,'' said Anna Schwartz, co-author of the 1963 book ``A Monetary History of the United States, 1867-1963'' with Nobel laureate Milton Friedman. ``The responsibility is right at the door of the Federal Reserve.''

Statistical modelers such as Bernanke have their own icon to draw on: the 18th century British mathematician and Presbyterian minister Thomas Bayes. Unlike Knight's apostles, Bayesians are more likely to quantify uncertainty by deriving probabilities. There is also a role for constant updating with new information to hone a forecast. Bayesian theory is used in hurricane tracking, for example.

Speeches suggest that members of the current FOMC are aware of the danger of overpaying for insurance again.

``Conditions can change quickly for better or for worse, especially in financial markets, so it's hard right now to speak with a great deal of confidence about future economic developments,'' San Francisco Fed President Janet Yellen said Sept. 10.

``A good example is the aftermath of the Russian debt default in 1998,'' she said. ``Many forecasters predicted a sharp economic slowdown as a result, but instead, growth turned out to be robust.''

Bank of England Relaxes Deposit Rules to Spur Lending (Update3)

By Brian Swint

Sept. 13 (Bloomberg) -- The Bank of England relaxed restrictions on financial institutions, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs that are threatening to hurt economic growth.

The move is the first by the U.K. central bank to help credit markets since the U.S. subprime mortgage market collapsed. Governor Mervyn King yesterday indicated the bank won't go as far as the European Central Bank and the Federal Reserve in helping banks cope with the credit rout because policy makers can't afford to ``encourage excessive risk-taking.''

``Today's operations do not represent an underwriting of risky lending but a logical move to help the efficient functioning of the U.K. money markets,'' said Philip Shaw, chief economist at Investec Securities in London.

Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each month-long maintenance period, can now undershoot that target by 37.5 percent to free up cash if needed. That compares with the usual limit of 1 percent.

The Bank of England also added a net 3.9 billion pounds ($7.9 billion) to money markets in its weekly market operation today.

The overnight rate for pounds fell 3 basis points to 5.87 percent after the announcement. It rose as high as 6.5 percent on Aug. 13. The three-month London interbank offered rate, or Libor, declined 1 basis point to 6.89 percent, still near its highest since 1998. The Bank of England's benchmark is currently at 5.75 percent.

Activism

The bank's response contrasts with the more activist approach of the ECB and the Fed. The ECB has loaned cash to banks in seven special auctions since Aug. 9. The Fed last month cut its discount interest rate and abandoned its bias towards fighting inflation.

The ECB has nevertheless struggled to get market rates under control. The three-month Libor for euros held near a six-year high of 4.73 percent today, which compares with the bank's benchmark rate of 4 percent.

``By not pumping the market full of liquidity as the ECB and Fed have done, to little effect if three-month Libor rates are a guide,'' the Bank of England ``also sticks to the line that they have taken on moral hazard,'' said Marcus Ostwald, a fixed-income strategist at Insinger de Beaufort SA in London.

The bank today widened the reserves target for the first time since the current system for dealing with market turmoil was introduced in May last year.

King yesterday refused to deviate from those rules and rejected calls to provide commercial banks with more longer-term cash to reduce borrowing costs.

``The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,'' King said in written testimony to the U.K. Parliament's Treasury Committee. ``That encourages excessive risk- taking, and sows the seeds of a future financial crisis.''

The bank today allocated 38.4 billion pounds at its benchmark rate as 34.5 billion pounds matured. Banks bid for a total of 182.9 billion pounds. That compares with 179.7 billion pounds a week ago and 79.2 billion pounds on Aug. 2, before the credit market slump.

Japan's Economy Contracts a More-Than-Expected 1.2% (Update3)

 By Lily Nonomiya


Sept. 10 (Bloomberg) -- Japan's economy contracted at almost twice the pace forecast by analysts in the second quarter, hardening speculation the central bank will refrain from raising interest rates this year.

The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The result was less than the government's initial estimate for a 0.5 percent expansion.

Bond yields fell to the lowest level since February last year and the benchmark Nikkei 225 stock average slumped more than 2 percent. Any rebound in growth depends on the severity of the housing recession in the U.S., Japan's biggest export market.

``A move by the Bank of Japan is out of the question,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo. ``A cloud is hanging over the domestic and global economy.''

The median forecast of 31 economists surveyed by Bloomberg News was for the economy to recede at a 0.7 percent annual pace.

The yield on the benchmark 10-year bond slid 8 basis points to 1.51 percent at 9:39 a.m. in Tokyo. The Nikkei 225 tumbled 2.7 percent. The yen traded at 112.92 per dollar from 113 before the report was published.

The economy contracted 0.3 percent from the previous quarter. The Cabinet Office revised the data to show that the last time the economy shrank was in the third quarter of 2006, when it fell 0.1 percent from the previous quarter.

Capital Investment

Capital investment declined 1.2 percent, reflecting last week's report that showed spending by companies unexpectedly declined in the quarter. Spending by consumers was revised to show a 0.3 percent increase, lower than the initial estimate for a 0.4 percent gain. Public investment was revised to a 2.6 percent drop from the previous estimate for a 2.1 percent slide.

Investors now see a zero percent chance that the bank will raise the benchmark rate from 0.5 percent when policy makers conclude their next meeting on Sept. 19, according to Credit Suisse Group calculations based on interest-rate swaps.

Expectations of a rate increase have fallen since losses on U.S. subprime mortgages caused corporate credit costs to jump, global stocks to plummet and the yen to surge.

The Federal Reserve will probably cut its key rate to 5 percent from 5.25 percent when it meets Sept. 18, according to the median forecast of 111 economists surveyed by Bloomberg News.

Federal Reserve

``A September increase is very unlikely as the BOJ won't want to tighten policy at a time when global market stability is a top priority,'' said Hideo Kumano, a senior economist at Dai- Ichi Life Research Institute and a former BOJ official. ``They especially wouldn't want to raise rates a day after the Fed cuts them.''

Since July, economic growth has shown signs of losing momentum. The trade surplus shrank for the first time this year on weak export growth and industrial production fell. Household spending, a measure of consumer activity, had the biggest drop since December.

Japan's economic expansion has cooled since growth surged at a 5.4 percent clip in the fourth quarter, the fastest pace in two years.

There are indications the economy will accelerate again, albeit at a slower pace than some economists had been forecasting.

Weak Rebound

``There are enough warning signs in the latest business and consumer surveys to suggest that the subsequent rebound may be rather weaker that usual,'' Julian Jessop, an economist at Capital Economics in London, said in a note.

Japan's broadest indicator of the outlook for growth was 70 in July. A reading of 50 or more indicates the economy may expand in three to six months.

``The recent rebound in the index is reassuring,'' said Jessop.

Manufacturers expect industrial production to improve after July's drop. They forecast then that output would rise 6.8 percent in August and 2.5 percent in September.

A report tomorrow is expected to show that machinery orders, which point to capital spending in three to six months, probably rose 5.3 percent in July, according to the median forecast of 21 economists surveyed by Bloomberg News.

``My scenario is Japan's economy gets better from here as industrial production picks up,'' said Masamichi Adachi, an economist at JPMorgan Securities Japan Co. in Tokyo.

Global Growth Threatened as U.S. Contagion Infects Asia, Europe

 By Rich Miller


Sept. 10 (Bloomberg) -- This time, when the U.S. sneezes, the rest of the world may well catch a cold.

Global economic growth looks likely to slow markedly in the months ahead as further weakness in the U.S. infects Asia and Europe. That would represent a shift from the last 18 months, when the world economy proved immune to a U.S. slowdown and grew at an annual clip of more than 5 percent.

What's different now is the U.S. slump is starting to spread from the domestic housing market to consumers who buy imports from companies such as Toyota Motor Corp. And the sudden increase in borrowing costs that followed the collapse of the subprime-mortgage market is now showing up overseas, raising the price tag on credit worldwide.

``It will be a much bigger deal this time,'' says Raghuram Rajan, a former chief economist for the International Monetary Fund who's now a professor at the University of Chicago. ``I don't see growth falling off a cliff, but it will slow.''

If growth in the U.S. slips below 2 percent from an average of 2.3 percent in the first half, the global economy may suffer a modest slowdown to about 4.75 percent, say forecasters at Morgan Stanley & Co., Global Insight and the Economist Intelligence Unit. The contagion from a U.S. recession would hurt more, cutting global growth to 3.5 percent or less.

`Major Problem'

``If we have a major problem in the U.S., the rest of the world will feel an impact,'' says Otmar Issing, former chief economist of the European Central Bank.

Faced with an unsettled global outlook, central bankers in England, Europe, Canada, Australia and South Korea held back on raising interest rates last week. In the U.S., futures-market traders are betting that Federal Reserve Chairman Ben S. Bernanke and his colleagues will cut rates when they meet on Sept. 18.

The world economy is most at risk when a shock -- like the steep oil-price increases of the 1970s -- hits the U.S. and other nations simultaneously, according to an April IMF study. That's what seems to be happening now, as global investors and lenders turn more cautious in response to rising delinquencies on loans to borrowers with patchy credit.

To be sure, the world economy is stronger than it was when turmoil last struck credit markets a decade ago, driving much of Asia into recession.

Slower Growth

Still, there's agreement that global growth will suffer -- even among some prominent Wall Street proponents of the theory that the rest of the world can ``decouple'' from the U.S., including Jim O'Neill, chief economist at Goldman Sachs Group Inc., and Stephen Jen, head of foreign-exchange research for Morgan Stanley, both in London.

While Luxembourg Prime Minister and Finance Minister Jean- Claude Juncker doesn't see a ``major'' hit in 2007 for the 13 nations that use the euro, ``there could be a stronger impact'' next year, he told reporters Sept. 5. Juncker is the chairman of a panel of euro-zone finance ministers.

Even before the latest rise in borrowing costs, some of Europe's strongest housing markets were showing signs of weakness. Spanish home starts plunged 21 percent in May, virtually wiping out growth for the year, while Irish house prices suffered their first annual decline in at least a decade in July.

Qualceram Shires Plc, an Irish maker of ceramic bathroom sinks and toilets, said on Sept. 4 that its first-half profits fell 7.4 percent as cooling property markets in Ireland and the U.K. reduced sales.

Trouble Ahead

There could be further trouble ahead. U.K. lenders, including Merrill Lynch & Co.'s Mortgages Plc unit and Deutsche Bank AG, are tightening terms on home loans, raising the cost for borrowers with less-than-perfect credit ratings.

``The same person trying to get a mortgage will find the situation more difficult now than three months ago,'' says Fionnuala Earley, chief economist at Nationwide Building Society, the U.K.'s fifth-biggest home lender.

European companies also face higher costs as the region's banks become stingier with their money, says Adam Posen, a former Fed official who is now at the Peterson Institute for International Economics in Washington.

German business confidence fell to a 10-month low in August after a rise in the cost of credit, according to the Munich- based Ifo Institute for Economic Research.

Tighter Credit

While tighter credit will take a toll on Asia, the region's economies are even more vulnerable to a slowdown in U.S. demand for their products. Consumer spending, which accounts for about 70 percent of the U.S. economy, rose at an annual rate of 1.4 percent in the second quarter, its slowest pace in a year.

Asia is ``still heavily dependent on exports,'' Stephen Roach, chairman of Morgan Stanley in Asia, said in an interview on Sept. 6. ``And the largest market for most Asian economies remains the overly extended American consumer, who I think is the next shoe to drop in the subprime shake-out scenario.''

Some Asian countries are already feeling the impact. The growth of Thailand's exports slowed to an annual rate of about 6 percent in July and August from 18.1 percent in June. Malaysia's exports declined for a second straight month in July as waning U.S. demand reduced shipments of electrical and electronic goods.

Even China's booming economy is susceptible to a consumer- led slowdown. The U.S. is China's biggest single-nation trading partner, accounting for nearly one-fifth of its record $107.7 billion exports in July.

`Serious Risk'

``The rising probability of a U.S. recession and growing trade protectionism means China's export growth is at serious risk,'' Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong, said in an Aug. 30 report to clients.

Faced with inflation at a 10-year high, China has raised interest rates and acted to curb bank lending to cool its overheated economy. Sun Mingchun, an economist for Lehman Brothers Holdings in Hong Kong, said in an Aug. 31 note that those concerns ``could be turned on their head if the global economy turns down sharply.''

Japan, Asia's biggest economy, is already showing signs of faltering. Gross domestic product probably shrank in the second quarter for the first time in more than two years as companies pared spending and exports failed to contribute to growth, economists surveyed by Bloomberg say.

Toyota, Japan's largest automaker, saw its U.S. sales drop for the second straight month in August, the first back-to-back decline in 4 1/2 years. Weaker demand in California, Toyota's biggest U.S. market and one of the states where housing is slumping, was partially to blame.

``There is a lack of confidence over where the economy is heading,'' Bob Carter, head of U.S. sales for the Toyota brand, said on Sept. 5. The Toyota City, Japan-based company ``would welcome'' a Fed interest-rate cut, he added.