Bernanke to Cut Rates Further, Faster to Buoy Growth (Update2)

By Craig Torres


Jan. 23 (Bloomberg) --

Federal Reserve Chairman Ben S. Bernanke has decided inflation concerns have faded enough to let him cut interest rates further and faster to keep the U.S. from tipping world economies into recession.

``Now they are free to move very aggressively,'' said New York University professor Mark Gertler, a research co-author with Bernanke and policy consultant at the New York Fed. ``They want to avoid asset panic. They don't want the declines to disrupt credit flows.''

The Fed's emergency rate cut yesterday signals a dramatic shift by policy makers from inflation to growth concerns. It indicates they now see a risk of lower home and stock values feeding back into tighter credit conditions that threaten to choke off growth, economists said.

A decline in oil prices, lower readings on expected inflation, higher unemployment and slowing factory production all helped convince the Federal Open Market Committee that it can lower interest rates more and quicker.

``The action by the Fed is welcome because it's going to pull us out of this much faster,'' Cerberus Capital Management LP Chairman and former Treasury Secretary John Snow said in a Bloomberg Television interview today.

Futures trading suggests a 64 percent chance the Fed will follow up with a cut of as much as another half point Jan. 30, bringing the decrease to 1.25 percentage points in eight days.

Economists' Forecasts

Such a reduction, forecast by analysts including Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., would be the deepest since the Fed started using the federal funds rate as its main monetary-policy tool around 1990. Futures markets show a 36 percent chance of a 75 basis-point cut. A basis point is 0.01 percentage point.

``Fighting inflation can follow a plan; combating weakness requires improvisation,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs. ``Now, they've switched gears'' and ``will keep easing'' until they sense the economy has reached a turning point.

For Bernanke, 54, that's an about-face from the past five months, when inflation formed the ballast of every policy decision, and forecasts, not markets or near-term data, drove changes in interest rates.

Until yesterday, the Fed had lowered the benchmark lending rate just 1 percentage point in the face of economic weakness, and had used separate tools to deal with liquidity problems in credit markets.

Jan. 30 Cut

Futures contracts on the Chicago Board of Trade show an 80 percent chance the central bank will reduce the rate by 50 basis points on Jan. 30 to 3 percent. A week ago, traders saw no chance the Fed would cut the target below 3.5 percent this month.

The inflation-wary pattern of rate moves under Bernanke befuddled investors who criticized the central bank for treating the symptoms of tighter credit without diagnosing the eventual impact it would have on the economy.

``This should have been done months ago,'' said Steven Einhorn, vice chairman of New York-based Omega Advisors Inc., a $5 billion hedge fund, in response to yesterday's rate action. ``I have a lot of respect for capital markets, and they have been unambiguous in their view of the Federal Reserve: Up until now, every debt instrument out there told you they had been tame, timid and tardy.''

Gertler, who co-wrote a series of papers with Bernanke on how asset prices influence lending, said the Fed had good reason to rely on tools other than monetary policy to address turmoil in credit markets during the last five months of 2007, a strategy he termed ``masterful.''

Fine-Tuning

In August, Fed officials reduced the cost of direct loans from the central bank, and continued to fine-tune ways banks could use the so-called discount window to boost the flow of credit to financial markets. In December, the Fed introduced the term-auction facility, aimed at distributing cash throughout the banking system, to remedy the increasing wariness of financial institutions to lend to each other.

As policy makers acted three times between September and December to lower the federal funds rate, none of their statements suggested they had begun a sustained campaign of rate cuts.

``They seemed to not fully to understand the implications of the seizing up of credit,'' said Einhorn, former head of global research at Goldman Sachs. ``They weren't preemptive, and the capital markets gave them ample evidence they were behind the curve.''

Helicopter

Gertler said the Fed could ill afford to move too quickly to cut rates last year, with the economy growing 4.9 percent in the third quarter, oil marching toward a record $100 a barrel and unemployment below 5 percent until December.

If Fed officials had cut rates in August, ``markets would have been screaming, `Helicopter Ben!''' Gertler said, a reference to Bernanke's 2002 quip about fighting deflation with a ``helicopter drop'' of money.

Gertler said ``the whole key'' to creating conditions for aggressive easing ``is anchoring inflation expectations,'' even if that must come at a cost of slower growth. ``If the Fed had dropped rates like a rock at the first hint of bad news, they seriously risked the danger of losing credibility,'' he added.

While the Fed has two mandates from Congress, low inflation and sustained growth, current Fed officials have made stable prices the essential condition on which their ability to offset growth risks is based.

They tolerate monthly movements in the consumer price index. What those measures mean to the public's view of future prices, a concept economists call ``expectations,'' is what really counts.

``They have been closet inflation targeters,'' said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. ``Hence, they were grudging in delivering policy ease last year and had trouble explaining their action.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Bernanke Says Fiscal Stimulus Could Revive Expansion (Update7)

By Craig Torres and Scott Lanman


Jan. 17 (Bloomberg) --

Federal Reserve Chairman Ben S. Bernanke said fiscal stimulus of as much as $150 billion would help revive economic growth, while warning against any widening of the budget deficit in coming years.

Bernanke's acknowledgment that the economy is weak enough to need stimulus validates forecasts that the Fed will lower interest rates by at least half a percentage point this month. President George W. Bush will tomorrow lay out the general principles he favors for a short-term stimulus, Deputy Press Secretary Tony Fratto said today.

A temporary package of at least $60 billion to $70 billion in spending by early 2009 would have a ``significant'' effect in the second half of this year, Bernanke said.

``It would certainly be measurable, it would not be window dressing,'' he told the House Budget Committee in Washington today in response to a question.

He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' on interest rates to insure against risks of a recession. Treasury notes rallied and the dollar dropped after Bernanke's remarks and a report from the Fed's Philadelphia branch showing manufacturing shrank.

``Support of a temporary fiscal stimulus suggests great concern on Bernanke's part about the downside risks,'' said Robert Eisenbeis, a former research director at the Atlanta Fed. ``He certainly doesn't want to be held responsible for a recession, even though the seeds were laid'' in final years of former chairman Alan Greenspan's tenure, he said.

Rebate, Business Breaks

The Bush administration is close to completing an economic- stimulus proposal that will include $800 rebates for individuals and $1,600 for households as well as tax breaks for businesses, people familiar with the plan said today.

Bernanke warned that a fiscal package could also ``prove quite counterproductive'' if it arrived at the ``wrong time or compromised fiscal discipline in the longer term.''

Bernanke reiterated that the outlook for growth in 2008 has worsened and ``the downside risks to growth have become more pronounced.'' He said the Fed isn't forecasting a recession this year.

Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years.

Bernanke noted that banks are trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result.

``Banks have also evidently become more restrictive in their lending to firms and households,'' he said. ``More expensive and less-available credit seems likely to impose a measure of restraint on economic growth.''

Housing Starts Tumble

Homebuilders broke ground on the fewest homes since 1991 last month, the Commerce Department reported today. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Residential construction subtracted about 1 percent from growth in the third quarter, and likely curtailed growth even more in the fourth quarter, Bernanke said. Sluggish housing markets ``may continue to be a drag on growth for a good part of this year.''

Bernanke said inflation, both including and excluding food and energy costs, ``should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken.'' He cited inflation expectations that appear ``well anchored'' and futures suggesting food and energy price increases will slow.

Split With Greenspan

Bernanke, as in past congressional appearances, avoided recommending any particular tax measure or spending program. His predecessor, Alan Greenspan, involved himself in shaping tax policy, recommending cuts over spending increases in 2001, a strategy which his colleagues disliked out of concern it would compromise the central bank's independence.

The chairman's speech ``is an endorsement of temporary measures, if enacted quickly, but he's covering himself to ensure he is not blamed for anything in a few years, the way Greenspan is now blamed for endorsing the Bush tax cuts,'' said Ian Morris, chief U.S. economist at HSBC Securities USA Inc.

Aside from quick implementation, a stimulus package should also be ``structured so that its effects on aggregate spending are felt as much as possible in the next 12 months,'' Bernanke said today. If stimulus comes at a time when growth is improving, it could be ``destabilizing,'' he said.

Bernanke Guidance

While Bernanke stressed that it's up to elected lawmakers to decide on tax and spending proposals, he did offer advice on the types of measures that may be more effective. He urged that they ``diversify'' the components to broaden the impact.

There is the most ``bang for the buck'' from transferring funds to lower- and middle-income workers because they are more likely than the wealthy to spend the money quickly, Bernanke said. Tax rebates in 2001 helped bolster consumer spending and prevent a deeper recession, the Fed chief said.

Turning to corporate taxes, Bernanke said incentives for investment in software and equipment would be more effective than a cut in the corporate tax rate. He suggested that the rate is more a question for the longer term.

Bernanke declined to comment directly when asked by Republican legislators whether he favors making permanent the 2001 and 2003 tax cuts scheduled to expire in 2010. At the same time, he said that making dividend-tax cuts permanent could have a short-term impact on financial markets.

While stating that tax cuts ``don't generally pay for themselves'' and urging lawmakers to balance the budget, Bernanke said that for a short-term package to help the economy, it would need to widen the budget gap at least for a time.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net , Scott Lanman in Washington at slanman@bloomberg.net

Bair Dissatisfied With Pace of Mortgage Modifications (Update2)

By Alison Vekshin

Jan. 17 (Bloomberg) --

Federal Deposit Insurance Corp. Chairman Sheila Bair said mortgage companies aren't modifying subprime loans quickly enough, one month after the government brokered a deal with the industry aimed at averting foreclosures.

``We must see a pickup in the pace, and the sooner the better,'' Bair said today at a Bear Stearns mortgage and structured products conference in New York. The industry's progress on modifications is not going ``as well as it should be,'' and regulators will be ``closely watching'' its progress, Bair said.

Bair has been the strongest voice among U.S. regulators in pressing mortgage servicers to modify loans for cash-strapped borrowers as foreclosure rates reach record levels. In recent months, she has advocated allowing borrowers with adjustable-rate subprime mortgages to continue making payments at the ``starter'' rate if they can't afford an increase.

Treasury Secretary Henry Paulson last month announced an agreement with mortgage lenders to freeze rates on some subprime loans for five years, a move that the Treasury Department said could affect as many as 1.2 million homeowners.

``Working with Treasury and government regulators, the industry has tools to address this on its own,'' Bair said in her speech. ``And the key is to quickly get borrowers who can afford their homes into long-term loans they can afford to pay.''

`Way Behind'

Lawmakers at all levels of government will explore additional steps if foreclosures keep rising and the economic fallout continues, she said.

``I very much believe in the market,'' Bair said. ``But if market solutions fail to solve the problem, government will step in.''

Bair cited a November Moody's Investors Service report that showed 3.5 percent of loans that reset in the first eight months of 2007 had been modified.

``That puts us way behind the curve going into the new year,'' Bair said, adding that nearly 2 million subprime borrowers will face resets through the end of 2009.

Lenders helped 235,000 of 33 million homeowners avert foreclosure by modifying loans or setting up repayment plans in the three months ended Sept. 30, 2007, the Washington-based Mortgage Bankers Association reported today.

Adjustable-Rate Loans

Servicers modified 13,000 subprime adjustable-rate loans, those considered at greatest risk of foreclosure, and set up 90,000 repayment plans for those mortgages, the industry group said. The banks started foreclosure proceedings on about 384,000 loans.

``What this shows is that there are certain borrowers obviously that are beyond help,'' Jay Brinkmann, the group's vice president of research and the report's author, said in a telephone interview. ``Modifications are a tool, but it's not going to solve every case.''

The survey's data predates the Treasury agreement, in which participants committed to produce monthly reports on their progress.

Americans behind on mortgage payments in the third quarter reached the highest level in 21 years and foreclosures hit a record, the Mortgage Bankers Association said last month.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net .

Bush Stimulus Plan Includes $1,600 Rebate, People Say (Update2)

By Matthew Benjamin


Jan. 17 (Bloomberg) --

The Bush administration is close to completing an economic-stimulus proposal that will include $800 rebates for individuals and $1,600 for households as well as tax breaks for businesses, people familiar with the plan said.

The proposal is subject to revision as administration officials consult with Republican and Democratic lawmakers in Washington, the people said.

President George W. Bush will lay out the ``principles'' of the economic package tomorrow, though it's ``too early'' to unveil a final proposal, according to his spokesman, who declined to provide details. Congressional leaders say a stimulus package may be as much as $150 billion.

Bush, who returned last night from a trip to the Middle East, has decided the U.S. needs short-term economic assistance from the government to avert an election-year recession, White House officials said earlier today.

``The president does believe that over the short term, to deal with this softening of the economy, that some boost is necessary,'' Deputy Press Secretary Tony Fratto told reporters at a briefing. Bush won't press Congress to extend the tax cuts passed during his first term and set to expire in 2010 as part of the plan.

``The President supports a permanent extension of his tax cuts, and he supports a short-term growth package, but they are separate,'' Fratto said.

Planning

White House and Treasury officials have been working since late November on the outlines of a plan to stave off a recession or ameliorate the effects if one occurs.

The plan the administration is close to proposing includes a temporary elimination of the bottom tax rate, which is now 10 percent, and a consequent lump-sum rebate to all taxpayers, according to the people.

Businesses would get a tax break under the plan that would allow them to deduct 50 percent of the price of new equipment they purchase this year. Small businesses would be able to deduct as much as $200,000 in new equipment purchases, up from the current $112,000 limit.

Asked about the details, a Treasury spokeswoman declined to comment.

House Republican leader John Boehner told reporters in Washington that a package of $100 billion to $150 billion is being discussed by administration officials and lawmakers.

Democrats in Congress are working on their own stimulus plan, which is also expected to include a tax rebate, as well as public works spending and additional aid for the poor through food stamps and other programs.

Bipartisan Support

The deteriorating economy has brought both parties to the conclusion that legislation must be passed and implemented quickly if it is to have any effect. The jobless rate rose to 5 percent in December from 4.7 percent a month earlier, and economists at Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley say the U.S. is probably sliding into a recession.

Senator Hillary Clinton today increased the size of her stimulus proposal, to $110 billion from $70 billion because of signs of further weakness in the economy, according to a press release. Clinton, of New York, and Senator Barack Obama of Illinois, are the leaders in the race for the Democratic presidential nomination. Both have proposed packages of measures to boost the economy.

Arizona Senator John McCain, who's seeking the Republican nomination, today announced an economic-growth plan that would lower the corporate tax rate to 25 percent from 35 percent and give other breaks to business. It avoided short-term stimulus.

Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee in Washington today that a fiscal boost of as much as $150 billion would help revive economic growth.

A package of $100 billion ``would certainly be measurable, it would not be window dressing,'' said Bernanke.

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

Japan November Service Demand Rose for Second Month (Update2)

By Toru Fujioka


Jan. 18 (Bloomberg) --

Japan's demand for services unexpectedly climbed for a second month in November, as people spent more on weddings and horse racing.

The tertiary index, a gauge of money households and businesses spend on phone calls, power and transportation, rose 0.1 percent from a month earlier, the Trade Ministry said today in Tokyo. The median estimate of 40 economists surveyed by Bloomberg News was a 0.4 percent drop.

Gains may not be sustained as falling wages and higher oil costs crimp spending by consumers, whose outlays account for more than half of the economy. Some 55 percent of consumers surveyed by the central bank said they plan to pare spending in 2008 because of higher prices, a report this week showed.

``The service sector is losing momentum as Japan's economy slows,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``Domestic demand will weaken as rising oil prices make companies and households more cautious.''

The yen traded at 106.66 against the dollar at 10:59 a.m. in Tokyo, from 106.43 before the report was released.

The increase in service demand was led by one-off factors. Demand for wedding services increased after more days that Japanese tradition holds auspicious fell on weekends or national holidays. People also returned to race tracks in November after meets postponed because of horse flu were held in the month.

``Growth in the service industry has been flat, and this may be reflecting Japan's slowdown,'' said Masato Hisatake, director of economic analysis office at the Trade Ministry.

Five-Year Low

Merchant sentiment fell to a five-year low in December, the government's Economy Watchers index, a survey of barbers, shopkeepers and other people on the frontline of the economy, showed last week.

Japan's core consumer prices, which exclude fresh food, rose at the fastest pace in more than nine years in November. In contrast, wages slipped 0.2 percent, the 10th drop in 11 months.

``Our customers are clearly not in the mood to spend more,'' said Katsuya Okada, a taxi driver in Tokyo. ``It's a very cold winter with sales declining and gasoline prices rising.''

Seven & I Holdings Co., Japan's largest retailer, and J. Front Retailing Co., the country's biggest department-store operator, cut their full-year profit forecasts yesterday on weak clothing sales.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

BOJ Will Probably Keep Rate at 0.5% as Growth Slows (Update1)

By Mayumi Otsuma


Jan. 18 (Bloomberg) --

The Bank of Japan will probably keep interest rates on hold next week and may acknowledge the economy isn't growing as fast as it has estimated.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Jan. 22, according to all 38 economists surveyed by Bloomberg News. The rate, doubled last February, is the lowest among major economies.

Japan's expansion will keep slowing ``for the time being'' and the cycle of profits feeding into wages and consumption is ``weakening,'' Fukui and his deputy Toshiro Muto said last week. Some investors anticipate a rate cut as a housing slump in the U.S., Japan's biggest export market, slows demand and costlier oil and raw materials erode profits at home.

``The chance of a rate increase in 2008 has almost disappeared, while the possibility of a cut has risen to between 30 percent and 40 percent,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

There's a 32 percent chance the bank will reduce the benchmark rate by July, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. Japanese stocks are headed for a third weekly decline on concern the U.S. economy is in a recession.

U.S. President George W. Bush will today unveil an economic stimulus proposal that may include rebates for households and tax breaks for businesses. Federal Reserve Chairman Ben S. Bernanke said yesterday fiscal stimulus would help revive the U.S. economy and reiterated more interest-rate cuts were needed.

Semiannual Outlook

Fukui's policy board will say Japan's economy is performing worse than it anticipated in a twice-yearly outlook in October, and may even cut its growth forecasts at the meeting, according to economists. The bank typically only revises the forecasts in April and October.

Japan's economy will expand 1.8 percent in the year ending March 31 and 2.1 percent in the following year, the central bank said in October. The government already lowered its growth forecast for this fiscal year to 1.3 percent from 2.1 percent after stricter building-permit rules caused housing starts to tumble to a four-decade low.

``The central bank will probably stick to the view that the economy's positive cycle is intact'' while conceding that growth is slower than it predicted three months ago, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd. in Tokyo. ``In my view, the framework of the bank's outlook is already falling apart and warrants a big revision.''

Conditions Worsening

The central bank last month lowered its assessment of the economy for the first time in three years. Heads of its branches nationwide this week said conditions were worsening in four of Japan's nine regions as housing investment declined and small businesses struggled to pass rising costs on to clients.

Oil and food costs, rather than consumer demand, caused inflation to quicken to the fastest pace in almost a decade in November. Consumer prices excluding fresh food rose 0.4 percent from a year earlier, while wages fell for a third month.

Fukui told parliament last week that higher costs may squeeze profits and slow growth while also lifting consumer prices higher, making policy decisions difficult.

There are signs of weakening demand from abroad as well as at home. Machinery orders fell in November from a month earlier as companies pared spending in anticipation the U.S. slowdown will hurt exports. Goldman Sachs Group Inc. last week said there's a 50 percent chance of a recession in Japan, citing the risk of slower growth in emerging markets.

Most analysts still expect the bank to stick to its policy of raising borrowing costs. Nineteen of 30 economists surveyed said there is a chance of a rate increase in 2008.

Gradual Increases

Fukui reiterated last week that rates need to be lifted gradually as long as the economy expands as expected. He and other policy makers have said keeping them low for too long could encourage overinvestment and make growth unsustainable.

``A rate cut could be an option should the Japanese economy slip into recession and a deflationary spiral, but that possibility is slim,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``With the benchmark rate only at 0.5 percent, a reduction would have a very limited impact on economic growth.''

The central bank will announce its policy decision on Jan. 22 in Tokyo, probably by early afternoon. It will publish its monthly assessment of the economy and a review of the twice- yearly outlook at 3 p.m. and Fukui will speak at a news briefing at 3:30 p.m.

=======================================================
As of 01/18/08 BOJ BOJ BOJ BOJ
Rates Rates Rates Rates
=======================================================
Date of Release 01/22 02/15 03/07 04/09
Time period 2008 2008 2008 2008
Measure % % % %
-------------------------------------------------------
# of replies 38 34 34 34
Median Forecast 0.50% 0.50% 0.50% 0.50%
% Forecast at Median 100.0% 97.1% 97.1% 97.1%
Average Forecast 0.50% 0.49% 0.49% 0.49%
Expected change 0.00% 0.00% 0.00% 0.00%
High Forecast 0.50% 0.50% 0.50% 0.50%
Low Forecast 0.50% 0.25% 0.25% 0.25%
Previous forecast 0.50% 0.50% 0.50% 0.50%
-------------------------------------------------------
ABN Amro Sec. 0.50% 0.50% 0.50% 0.50%
Action Economics 0.50% --- --- ---
Aletti Gestielle 0.50% 0.50% 0.50% 0.50%
BNP Paribas 0.50% 0.50% 0.50% 0.50%
Bank of America 0.50% 0.50% 0.50% 0.50%
Bayerische Landesbank 0.50% 0.50% 0.50% 0.50%
CFC Seymour 0.50% 0.50% 0.50% 0.50%
Capital Economics 0.50% 0.50% 0.50% 0.50%
Credit Suisse 0.50% 0.50% 0.50% 0.50%
DBS Group 0.50% 0.50% 0.50% 0.50%
DZ Bank 0.50% 0.50% 0.50% 0.50%
Dai-Ichi Life Resrch 0.50% 0.50% 0.50% 0.50%
Daiwa Research Inst. 0.50% 0.50% 0.50% 0.50%
Daiwa Sec SMBC 0.50% 0.50% 0.50% 0.50%
Dresdner Kleinwort 0.50% --- --- ---
Fortis Bank 0.50% 0.50% 0.50% 0.50%
Goldman Sachs 0.50% 0.50% 0.50% 0.50%
HSBC 0.50% 0.50% 0.50% 0.50%
Intesa Sanpaolo 0.50% 0.50% 0.50% 0.50%
J.P. Morgan 0.50% 0.50% 0.50% 0.50%
Lehman Brothers 0.50% 0.50% 0.50% 0.50%
Lloyd's TSB 0.50% 0.50% 0.50% 0.50%
Macroecon Global Adviso 0.50% 0.50% 0.50% 0.50%
Mitsubishi UFJ Sec. BCR 0.50% 0.25% 0.25% 0.25%
Mitsubishi UFJ Sec 0.50% 0.50% 0.50% 0.50%
Mizuho Securities 0.50% 0.50% 0.50% 0.50%
Morgan Stanley 0.50% 0.50% 0.50% 0.50%
Natixis 0.50% 0.50% 0.50% 0.50%
Nikko Citigroup 0.50% 0.50% 0.50% 0.50%
Nomura Securities 0.50% 0.50% 0.50% 0.50%
Norinchukin Research 0.50% 0.50% 0.50% 0.50%
RBS Securities 0.50% 0.50% 0.50% 0.50%
Shinshu Univeristy 0.50% 0.50% 0.50% 0.50%
Stone & McCarthy 0.50% --- --- ---
Tapiola Insurance 0.50% 0.50% 0.50% 0.50%
Totan Research 0.50% 0.50% 0.50% 0.50%
UBS Securities 0.50% 0.50% 0.50% 0.50%
WestLB 0.50% --- --- ---
=======================================================

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Bernanke Is Mistaken for Paulson Before Congress (Update1)

By Vivien Lou Chen


Jan. 17 (Bloomberg) --

Federal Reserve Chairman Ben S. Bernanke discovered that an Ivy League career just doesn't leave the same impression as a Wall Street resume for some lawmakers.

Approaching his second anniversary at the helm of the U.S. central bank, Bernanke found himself mistaken for Treasury Secretary Henry Paulson during a hearing in Congress today.

``Seeing as how you were the former CEO of Goldman Sachs,'' Representative Marcy Kaptur, a Democrat from Ohio, began to say before the Fed chief interjected.

``No, you're confusing me with the Treasury secretary,'' Bernanke said at the House Budget Committee hearing. Paulson was the chief executive officer of Goldman Sachs Group Inc. before joining the Treasury in 2006.

``I got the wrong firm?'' asked Kaptur, 61, who is serving her 13th term and represents northern Ohio's ninth Congressional district.

``Yes,'' replied Bernanke.

``Paulson. Oh, OK. Where were you, sir?''

``I was a CEO of the Princeton Economics Department,'' Bernanke replied to laughter from the hearing room. Bernanke, 54, chaired the economics department at the Ivy League university before becoming a Fed governor in 2002. He later headed the White House Council of Economic Advisers, becoming Fed chairman in February 2006.

Bernanke, who appears on the cover of this coming Sunday's New York Times magazine, acknowledged before Congress today that the economy is weak enough to need fiscal stimulus.

``It was an honest mistake,'' said Emily Boening, a spokeswoman for Kaptur. ``But the Republicans have made bigger, more severe mistakes on economic policy. It was a few seconds of a very productive hearing otherwise.''

To contact the reporter on this story: Vivien Lou Chen in San Francisco vchen1@bloomberg.net
Last Updated: January 17, 2008 18:07 EST

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

By Lily Nonomiya
More Photos/Details

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.