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Worrisome News From The Fed

From the Wall Street Journal’s Real Time Economics Blog yesterday:

U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also shows that many banks think the credit tightening trend could continue into the first half of 2009…

About 60% of the domestic banks surveyed reported having tightened lending standards to large and middle-market businesses. That’s up slightly from what was reported in the last Fed survey conducted in April and released in May. About 65% of the institutions, a percentage that is also up from the previous survey, also said they had tightened their lending standards on so-called commercial and industrial loans, also known as C&I loans, to small firms over the same period…

In addition, a significant portion of the banks surveyed reported having tightened their lending standards on prime, nontraditional and subprime residential mortgages over the previous three months. About 75% of domestic respondents, which is up from 60% in the previous survey released in May, said they had tightened their lending standards on prime mortgages. Also, six out of seven respondents that originated subprime mortgage loans, which is a higher proportion than what was reported in the previous survey, indicated that they had tightened their lending standards on those loans over the past three months.

Turning to the results of the survey’s consumer lending questions, about 65% of domestic banks indicated that they had tightened their lending standards on credit card loans over the past three months, which is up remarkably from the 30% reported in the survey released in May.

From Reuters’s John Parry earlier today:

U.S. economic growth is expected to slow more sharply in the coming months than previously forecast with employers shedding staff into next year, according to a Philadelphia Federal Reserve survey released on Tuesday.

Economists lowered their forecasts for third-quarter gross domestic product growth to a 1.2 percent annual rate from the previous 1.7 percent estimate, according to the bank’s quarterly Survey of Professional Forecasters.

“Growth in U.S. real output over the next few quarters looks slower now than it did just three months ago,” the Philadelphia Fed said on its Web site.

In the fourth quarter, the U.S. GDP growth forecast was slashed to 0.7 percent growth, from the previous 1.8 percent forecast…

The current survey also forecast the U.S. unemployment rate would be 5.7 percent in the third quarter, above its previous 5.4 percent forecast, then rising to 5.8 percent in the fourth quarter.

“A weaker near-term outlook for the labor market accompanies the outlook for slower output growth,” the Philadelphia Fed said.

From MarketWatch’s Rex Nutting today:

The U.S. economy faces a prolonged period of anemic growth, but that’s no reason to get complacent on inflation, said Dallas Fed President Richard Fisher in an interview with the Dallas Morning News published Tuesday. “I expect that in the second half of this year we will broach zero growth,” he said. Fisher, a voting member of the Federal Open Market Committee who’s been on the losing side on the past five votes on interest rates, said the credit crunch is worse than the S&L crisis of the late 1980s.

Sources:

“Fed Study: Banks Tighten Credit on Households, Businesses”
Night Editor
Wall Street Journal (Real Time Economics Blog), August 11, 2008

“UPDATE 1-US economy seen slowing more sharply-Philly Fed”
John Parry
Reuters, August 12, 2008

“Fed’s Fisher expects close to zero growth this year”
Rex Nutting
MarketWatch, August 12, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

No Recession? Bunk!

Does anyone still believe in the economic data being churned out by the federal government? From MarketWatch last Thursday:

Brian Pretti, chief investment strategist for East Bay-based Mechanics Bank, has one word for those who keep saying the nation is not yet in a recession: “Bunk.”

“We are still wringing out the excesses of the financial sector,” Pretti says, “and not only is the period of reconciliation–or deleveraging–not over, but we will be living with it for some time to come. We’re in a recession; there’s no other word for it.”

Then why don’t the numbers tell the story?

“Officially, a recession is defined as two consecutive quarters of negative, inflation-adjusted, gross domestic product (GDP) growth. But if you use the wrong inflation assumptions (called the deflator in the GDP reports), the conclusions are wrong, too.”

To illustrate, Pretti points to recent deflator factors used by the Fed to estimate GDP. “For the first quarter 2008, it was 2.7%, for the fourth quarter 2007, 2.4%, and 1% for third quarter 2007,” he says. “Where did the government come up with those numbers that are quite different than the CPI numbers? Since September 2007, the price of crude oil is up 100%; retail gasoline up 69%; natural gas 95%; and the Commodity Research Bureau index for foodstuffs is up 27%. The true nature of inflation in the US has been anywhere between 4-5%, and that means we’ve already been in a recession for a number of quarters.”

The year-over-year inflation as measured by the Consumer Price Index rests at 4.9% as of the June report, which was released yesterday. It highlights Pretti’s point–and calls into question the prior figures that have been used. “No wonder the financial markets aren’t buying the idea that the economy is ‘holding up,’” Pretti says. “Their negative behavior is telling us headline GDP numbers may not exactly be reflecting reality!”

Source:

“Wishful Thinking Aside, It’s a Recession, Folks”
MarketWatch, July 17, 2008

The “Make-Believe” Economy

Yesterday, I came across a post by FOX Business’ Elizabeth MacDonald that provides more ammunition to those who claim that the U.S. government manipulates economic data. In “EMac’s Stock Watch,” MacDonald talked about Kevin Phillips, a political and economic commentator for more than three decades, and a onetime Nixon strategist. She noted:

A generation ago Phillips wrote “The Emerging Republican Majority” which Newsweek magazine described as the “political bible of the Nixon administration,” and previously has dissected the fakery in the government deficit numbers- federal, budget, current account and trade deficits- where he says that essentially the country is living on “borrowed prosperity.”

Recently, Phillips released a new work and claims that we are living in a “make-believe” economy. MacDonald wrote:

Phillips, author of “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism,” (Viking, April 2008), says that the government has manipulated economic numbers to create a “make-believe economy” over the last four decades. Phillips says that since the ‘60s, Washington bureaucrats from both sides of the political aisle have pulled the levers behind the scenes to overplay the vitality of the US economy…

Specifically, Phillips targets three of the most closely watched and what he says are highly manipulated economic measures: The consumer price index, which tracks inflation; the gross domestic product, which tracks the economy’s overall growth; and the monthly unemployment figure.

Phillips says that, once you vacuum out the nonsense, inflation is really at 5% (instead of 2%), average annual GDP growth is in the 1% range (instead of the 3% to 4% range), and unemployment is really at 8% (instead of 5%).

MacDonald’s post is a good read. Of particular interest are the parts where she talks in detail about how the federal government has “monkeyed around” with the economic data since the Kennedy administration.

You can read her post here.

Source:

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008

WSJ Survey: U.S. Economy In Recession, Further To Fall

The Wall Street Journal’s Phil Izzo talked about the latest Journal forecasting survey of 55 economists. Izzo wrote:

The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.

By a 3-to-1 margin, respondents said the economy is in a recession, and almost three quarters said the economy hasn’t yet hit bottom.

Highlights from the survey included:

• Fed Chairman Ben Bernanke’s approval rating rose slightly to 78 out of 100 from a 75 in February, which was the last time the question was asked.
• U.S. Treasury Secretary Henry Paulson’s rating fell a point to 73 from 74 in February.
• When asked what the biggest downside risk was to their forecasts, 35% of the economists said it was further deterioration in the credit markets, 25% said it was a sharp drop-off in consumer spending, and 13% said it was continued housing weakness.
• The survey group expects the economy to shed 1,625 jobs a month, on average, over the next year.
• They unemployment rate, now 5.1%, is expected to rise to 5.6% by December.
• Just 21% of economists predict home prices will reach a bottom this year. 67% see the bottom in 2009, and 12% say it won’t be until 2010.
• While most of those polled say the U.S. economy hasn’t hit a bottom yet, they expect gross domestic product to expand, on average, by 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter.
• The group expects the Federal Reserve to cut its benchmark federal funds rate by another half-percentage point by June, then keep rates unchanged for the remainder of 2008.

Source:

“Economy Has Further to Fall, According to Economists’ Survey”
Phil Izzo
Wall Street Journal, April 10, 2008

The Specter Of Recession

Earlier today, Fed Chair Ben Bernanke put a stake through the hearts of Pollyannas with his comments about the U.S. economy. The Wall Street Journal’s Sudeep Reddy wrote:

Federal Reserve Chairman Ben Bernanke has uttered the “R” word. Responding to a question at today’s Joint Economic Committee hearing, Mr. Bernanke said publicly for the first time that “recession is possible” for the economy this year…

Mr. Bernanke said in his prepared remarks: “It now appears likely that real gross domestic product [GDP] will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies.” But, he added, “the uncertainty attending this forecast is quite high and the risks remain to the downside.”

Bernanke’s testimony before Congress took place on the same day the International Monetary Fund cut its forecast for global growth in 2008 and said there is a 25% chance for a world recession. Bloomberg’s Shamim Adam reported that the IMF was predicting the global economy will expand only 3.7% this year, the slowest pace since 2002, citing a document obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bankers in Da Nang, Vietnam. Adam wrote:

“The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,” the statement said. “The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.”

The Bloomberg reporter noted that when asked in a Bloomberg Television interview about the IMF’s analysis, U.S. Treasury Secretary Henry Paulson responded “that sounds overblown to me.”

Adam added that the U.S economy is forecast to grow a paltry 0.5% this year and “expand” 0.6% in 2009. However, the Agence France-Presse wrote yesterday:

The International Monetary Fund will next week forecast that the US economy will go into recession this year, a German newspaper reported Tuesday, citing a report to be released next week.

The US economy will experience at least two successive quarters of negative growth… and will grow only half a percent over the whole of 2008, weekly Die Zeit reported.

It is believed that the report will be released at the IMF’s spring meeting with the World Bank next week.

Sources:

“Bernanke: Recession Is Possible”
Sudeep Reddy
Wall Street Journal (Real Time Economics), April 2, 2008

“IMF Cuts Global Forecast on Worst Crisis Since 1930s (Update 3)”
Shamim Adam
Bloomberg, April 2, 2008

“IMF predicts US recession: report”
Agence France-Presse, April 1, 2008

When Martin Feldstein Talks, Smart People Listen

No— Martin Feldstein was never affiliated with E.F. Hutton. Rather, Dr. Feldstein is the George F. Baker Professor of Economics at Harvard University and the outgoing President and CEO of the National Bureau of Economic Research, which is the group that determines whether or not the U.S. economy is in a recession. Ros Krasny from MarketWatch caught up with the former economic advisor to President Reagan in Florida last week. Krasny wrote on Friday:

The United States is in a recession that could be “substantially more severe” than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday.

“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

“There’s no doubt that this year and next year are going to be very difficult years.”

Like an ominous storm cloud off the Florida coast, Krasny added:

Feldstein said the downturn could be the worst in the United States since World War Two.

Not good, folks. Dr. Feldstein explained his gloomy forecast for the U.S. economy. He believes the federal funds rate is headed down to 2%, adding that lower rates alone will not revive economic activity. The reason: a lack of liquidity in the credit markets. The economist said that in the global credit markets “there is a lack of confidence leading to a lack of liquidity… without credit creation, we can’t have economic growth.” He added that the combination of monetary and fiscal stimulus, along with a falling dollar, “will help to dampen the magnitude of the downturn but won’t be enough to sustain an expansion.”

All of these dire warnings, and still the NBER hasn’t declared an official recession yet (not like I’m in a hurry to hear it). MarketWatch’s Rex Nutting wrote yesterday that:

Although the official word won’t come for months, the economic data now available show that the recession probably began in December.

Four of the five indicators watched most carefully for signs of a break in economic growth are now trending lower.

It’s only a matter of time before the semi-official recession judges at the National Bureau of Economic Research meet to confirm it. They’ll wait a few months in case the trends that now seem so clear are revised higher.

According to MarketWatch’s Washington bureau chief, the four indicators that are trending lower include:

• Employment- Most important. Payrolls peaked in December and have now fallen for two consecutive months, with private-sector payrolls falling for three months in a row. The annualized growth rate over the past three months is negative 0.1%, down from 1% growth a year ago.
• Incomes- Second-most important signal. The annualized growth rate over the past three months is negative 0.8%, down from 4.7% growth a year ago.
• Industrial Output- Flat since July. The annualized growth rate over the past three months is negative 0.7%, down from 3.6% growth a year ago.
• Business Sales- Peaked in October. The annualized growth rate over the past three months is negative 3.7%, down from 4.1% growth a year ago.

The final indicator used by the NBER in determining a recession is the Monthly GDP Estimate produced by Macroeconomic Advisers. Nutting pointed out that it’s the only one of the five major indicators that’s still in positive territory, where the annualized growth rate over the past three months is 4%, up from 1.8% growth a year ago.

Sources:

“U.S. faces severe recession: NBER’s Feldstein”
Ros Krasny
MarketWatch, March 14, 2008

“Recession began in December, signposts say”
Rex Nutting
MarketWatch, March 17, 2008

U.S. Government Report Suggests U.S. May Enter Recession In 2008

According to the Financial Times (UK) today, “A US government report on Tuesday forecasted for the first time that the country’s economy would
enter recession in 2008.” Javier Blas, a Times commodities correspondent, wrote:

The Energy Information Administration, the statistical arm of the Department of Energy, said in its monthly oil report that the “US real gross domestic product is expected to decline slightly in the first half of the year”.

Blas noted that the Washington DC-based EIA did not specifically say that the U.S. economy would go into recession, “but two quarters of negative growth is a common definition of recession among economists,” he wrote. However, the National Bureau of Economic Research (NBER), the nation’s leading nonprofit economic research organization that is tasked with calling a recession, said on its website that:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

The White House and Federal Reserve have acknowledged that while the U.S. economy is slowing, a recession is unlikely. Yet, as Tom Raum of the Associated Press wrote Saturday:

Many economists say the U.S. economy is already in recession — even though it hasn’t met the classic definition of two back-to-back quarters of declining gross domestic product — and say the White House is trying to sugarcoat the statistics.

Raum quoted Standard and Poor’s chief economist David Wyss, who suggests the economy dipped into recession sometime last month. Wyss said:

They’re certainly trying to put the best face on the situation. They’re spinning it their way. I don’t think they’re falsifying the data. Presidents always play cheerleaders. I don’t think I’ve ever heard a president say that we were in a recession until we were just about out of it.

Sources:

“Government report forecasts US recession”
Javier Blas
Financial Times (UK), March 11, 2008

“Fact Check: Bush Offers Rosy View”
Tom Raum
Associated Press, March 8, 2008

Dallas Fed Director: ‘High Oil Prices Here To Stay’

On Tuesday, MarketWatch’s Stacey Delo interviewed Stephen Brown from the Federal Reserve Bank of Dallas while he attended the Clean Tech Forum in San Francisco. Brown, the Dallas Fed’s Director of Energy Economics and Microeconomic Policy Analysis, told MarketWatch that high oil prices are here to stay. He predicts that the price will fluctuate in the $90 to $100 range for the next 4 to 6 months. Furthermore, Brown suspects that gasoline prices are heading toward an all-time high in the week before/week of Memorial Day.

Dr. Brown, who is also an associate editor of the academic journal Energy Economics, believes that the ongoing economic slowdown in the United States has been driven by factors other than oil prices. During the interview, Brown claimed that energy prices are responsible for only 1/10 of a percentage point slowdown in GDP growth on any given quarter.

MarketWatch Broadband Video Link

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

European Banks Say U.S. In Recession

According to Reuters earlier today, Daniel Bouton, the chairman and CEO of French bank Société Générale, said that the U.S. economy is in a recession already. The head of one of France’s oldest banks said, “There is a recession in the U.S. for the early part of 2008.” This follows a statement yesterday by the second largest bank in Europe, Swiss-based UBS, which also pointed out the the U.S. economy is in recession. According to Reuters, UBS economists said that a weakening consumer sector, in conjunction with problems in the housing and credit markets, have pushed the United States into a mild economic recession. In a research report yesterday, UBS economists responded to questions of whether or not a recession had taken hold in the U.S. by stating, “It’s not coming, it’s here.”

The Swiss bank predicted that U.S. gross domestic product will fall 0.60% from the end of 2007 to the middle of 2008. Reuters’ Richard Leong noted that last month, the U.S. government said the economy grew at an annual rate of 0.4% in the fourth quarter of 2007 and expanded 2.2% for the entire year, the weakest pace in five years. UBS is predicting that the contraction will be led by the first decline in personal spending since the recession of 1990-1991.

Growing Number Of Economists Say Recession Is Here

Earlier today, MarketWatch reported that Nigel Gault, U.S. chief economist for Global Insight, now believes the U.S. economy is in a recession. Massachusetts-based Global Insight is recognized as the most consistently accurate forecasting company in the world, with over 3,800 clients in industry, finance, and government. In a research note released Thursday, Gault predicted a 0.4% drop in gross domestic product this quarter and a 0.5% decline next quarter. Mr. Gault is part of a growing number of economists who are now saying the United States is in an economic recession.

Caroline Baum of Bloomberg wrote an interesting article yesterday entitled “U.S. Recession Indicators Are All Pointing South.” Baum stated that it now appears the four indicators used by the National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) to assess turning points in the economy have peaked. She wrote:

Not by very much, mind you. And not for sufficiently long for the BCDC to make a determination that a recession has begun. The committee typically waits anywhere from six to 18 months after a recession has started to make it official.

As it now stands, though, the four indicators are all off their highs, with industrial production and real personal income less transfer payments peaking in September, real manufacturing and trade sales in October, and, most recently, employment in December.

“When all four kind of go south — as well as a fifth, Macroadvisers’ monthly GDP index – it’s a strong signal saying we need to start worrying,” says Maurine Haver, president of Haver Analytics, a provider of databases and software products for economic analysis.

Baum also spoke to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago, who wrote in his latest published forecast that, “Our bet is that the U.S. economy has entered a recession.” Kasriel explained that the recession will be “dominated by weakness in household spending,” as households ran a deficit (spending more than their after-tax income) from 2001 through 2007. The award-winning economist said that from 2003 to 2005, inflation-adjusted money market rates were either low or negative, which created a disincentive to save. Since home prices rose faster than the cost of carrying them (mortgage rates) and mortgages were widely-available, “household borrowing relative to disposable personal income hit a postwar record in 2006,” said Kasriel.

Further evidence of a U.S. recession appeared on Tuesday, when the ISM non-manufacturing index fell to a reading of 41.9% for January, down from 54.4% in December and the lowest level since October 2001. Readings below 50% indicate most firms are contracting. Greg Robb of MarketWatch wrote after the report’s release that, “For economists, the data from the Institute for Supply Management was the clearest signal to date of a recession.” Josh Shapiro, chief U.S. economist at MFR Inc., told the news service, “The reading for the ISM non-manufacturing composite, if sustained, is consistent with recession.”

Also last Tuesday, Chris Isidore of CNN Money wrote:

A growing number of top economists believe that the U.S. economy has now toppled into recession…

Some economists argued that the normally low-profile ISM services reading, coupled with the government’s report Friday showing the first monthly net loss in jobs in more than four years, is proof that recession is now a reality.

Keith Hembre, chief economist of First American Funds, told CNN Money that:

My forecast had been that the recession would begin this quarter, but the hard data wasn’t there yet. But now we’re seeing that. The service sector is a much larger component of the economy [than manufacturing] and this is very much a recession reading.

CNN Money’s senior writer said that economists took the latest report as a sign problems are no longer restricted to just housing and manufacturing. Gus Faucher, director of macroeconomics for Moody’s Economy.com, told CNN Money his firm now believes the economy is in a recession. Faucher said:

We’re definitely seeing conditions spread to more parts of the economy. The big drop in business activity, that’s a huge red flag.

Economist Bob Brusca of FAO Economics said he doubted that the U.S. was in recession a week ago, but now believes there is about a 75% chance that a recession began last month. Brusca explained:

That’s what recessions do. They come upon you all of a sudden. When you look back at history, you’re struck by how even-keel it is until the bottom just falls out.

Rate Cuts: Fastest Easing Of Monetary Policy Since 1990

Surprise, surprise. This afternoon, the Federal Reserve lowered the federal funds rate by 50 basis points to 3%. U.S. financial markets were hoping for a rate cut of this magnitude, and stocks responded by shedding earlier losses and climbing higher. The Fed also announced that it was cutting its discount rate (the interest it charges on direct loans it makes to banks) by a half-point to 3.5%. According to the Federal Open Market Committee statement issued at the end of the two-day meeting on interest rate policy:

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets…

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

There was only a passing reference to the threat of inflation:

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

A number of analysts fear that the rate cuts will stoke inflation fires, resulting in much higher rates at some point in 2009.

The cumulative reduction in rates since January 22 has been the fastest easing of monetary policy since 1990. Hours before the decision was announced, the Commerce Department reported that gross domestic product grew at an annual pace of 0.6% in the fourth quarter, the slowest since the end of 2002. Consumer spending and business investments slowed slightly in the fourth quarter, while investments in houses fell at the fastest rate in 26 years. Businesses reduced their inventories, while exports grew at a slower pace as well. Art Hogan, chief market strategist at global investment bank and institutional securities firm Jefferies & Co., told MarketWatch:

If you look at the magnitude of the easing that has happened in the last week – you’d have to go back to 1990 to see as an aggressive move — it shows just how concerned the Fed is about the pace of the U.S. economy.

David Resler, chief economist at Nomura Securities International Inc. in New York, told Bloomberg:

They’re going full-bore trying to keep the economy from recession. There’s nothing in reserve here.

The “R” word is being mentioned more frequently on the Street these days. Wall Street firms such as Citigroup, Goldman Sachs, Merrill Lynch, and Morgan Stanley are all forecasting the first recession since 2001 this year. Prior to the Fed’s announcement today, global news agency Agence France-Presse reported that former Fed chair Alan Greenspan had doubts about the central bank’s ability to prevent a recession in the United States. In an interview to appear on Thursday, Greenspan told the German weekly Die Zeit that the Federal Reserve or political policies could “probably not” keep the U.S. economy from sliding into recession. Greenspan was quoted as saying:

The influences of the global economy today are stronger than almost any monetary or budgetary response…

Real long-term interest rates have much more influence over the heart of economic activity than national decisions. And central banks have less and less power to influence long term rates.

Greenspan thinks there is a 50% chance for recession in the United States.

Head Of Group That Identifies Recessions Says 50% Probability

Last Friday, the head of the nation’s leading nonprofit economic research organization told Bloomberg in an interview that the chance of a recession in the United States stood at about 50%. Martin Feldstein, a Harvard University economist and president/CEO of the NBER (the group responsible for dating U.S. economic cycles), said there may “easily” be a U.S. economic recession in 2008 if consumer spending declines along with home values. When asked about the chance for an economic contraction, Feldstein replied, “I would put it at about 50 percent…” He said the risk “clearly has been increasing.”

The Ivy League economist also warned that, “There’s a danger of the U.S. falling into stagflation,” with gross domestic product shrinking and inflation increasing by around 3.5%. Feldstein added, “We are looking at a slightly higher inflation rate than we want.” However, he noted, “We are not back to the very high inflation rates we had in the late 1970s.” On whether or not the United States is heading towards stagflation, it “depends on how you want to define it.” Investopedia defines stagflation as, “A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.” On the Sunday ABC program “This Week,” fellow economist and former Fed chair Alan Greenspan told host George Stephanopoulos that, “We are beginning to get not stagflation, but the early symptoms of it.”

Vanguard Founder Says Recession Odds At 75 Percent

Earlier today, CNN Money posted the answers to questions Fortune readers asked of John Bogle, the 78-year-old founder of mutual fund giant Vanguard. With $1.3 trillion in assets, Vanguard is now the second-largest mutual fund company. Bogle talked about the odds of a U.S. recession, the U.S. housing market, the subprime crisis, and challenges to the U.S. economy, among other issues.

What are the odds of a recession right now?

I would put the odds of a recession at 75 percent. This economy is very much consumer-based, and I believe that 70 percent of the GDP is consumer spending. That’s a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending - we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Will the real estate market improve anytime soon?

It doesn’t look so good. I really don’t see it improving soon. At some point homes will have to be built. But right now there is not much incentive to build new places when there are so many old places on the market. When those lines cross I don’t know. It’s complicated by the fact that many people have gotten into ARMs [adjustable-rate mortgages] who didn’t know what they were doing. I don’t know what is going to happen to those people when lenders foreclose. When banks were community banks, they were more careful. But when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality. So we have to have a better system in the future to make sure we have a much better element of credit quality in mortgages.

How does the U.S. subprime mess compare with other crises you have seen in your career?

I’d say the most similar example was the S&L crisis of the late ‘80s and early ‘90s. The issues were somewhat the same: Institutions borrowed short and lent long.

The immediate concern for most investors is the subprime market, but over the long term what do you see as the biggest challenges facing the U.S. economy?

Externally, we are faced with $1.5 trillion already poured into Iraq and Afghanistan. So you have enormous expenditures in a corner of the world that is important to us, but it is very unwise to think we can bring democracy to a place that doesn’t share our values. There are also the challenges from low cost production in China and India. At home, we have a tremendous future financial problem with the federal deficit. We’ll have to take action on Social Security someday. Government spending has gotten to the point where we will have to either cut spending or raise taxes. Another problem is this deadlocked Congress. And I see the quality and caliber of our presidential nominees, and I am not impressed.

It raises the question of whether this country is even able to run itself anymore.