What will the Fed do?

Fed will act as needed to protect economy from market turmoil, official says

"The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability," Kroszner said in a speech here to the Institute of International Bankers.


Some economists believe the Fed will lower an important interest rate at the end of a two-day meeting next Wednesday, to help bolster economic activity. But others, citing the economy's resiliency and worries about an inflation flareup, think the Fed will leave rates alone. Oil prices, which had surged to record highs in recent weeks, have eased a bit but are still hovering above $86 a barrel.

It's a delicate situation facing the Fed.

To prevent the ill effects of the credit crunch and housing troubles from sinking the economy, the Fed in September sliced a key interest rate by a bold one-half percentage point to 4.75 percent. It was the first rate cut in more than four years.

Before that aggressive move, the Fed had taken other actions to deal with the credit crises, which had taken a turn for the worse in August. The Fed pumped billions of dollars into the financial system to help banks and other institutions get over the credit hump. It also reduced its lending rate to banks.

Comments: I predict a .25% rate cute. Not a good time to be selling a house! Still a good time to be buying stocks! I don't see the housing market recovering for some time (perhaps more than a year!). Meanwhile ...

IMF chief warns dollar may suffer 'abrupt fall'


The head of the International Monetary Fund, Rodrigo Rato, warned Monday there are risks of an "abrupt fall" in the dollar, linked to a loss of confidence in dollar assets.

"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato told the IMF board of governors.

He also appeared to suggest that Europe could take steps to temper the strong appreciation of the euro.

"There is a risk that exchange rate appreciation in countries with flexible exchange rates -- including the euro area -- could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen," he said on the final day of the annual meetings of the IMF and the World Bank.

The outgoing IMF managing director spoke as the European single currency hit a new high of 1.4347 dollars and global equity markets tumbled amid growing fears a US housing-related credit crunch could pitch the world's biggest economy into recession.

"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign economic environment of recent years for granted," he said.

"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn."

A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.

The spillover of the US credit crunch into global financial markets roiled stock markets worldwide in August and although they have recovered somewhat, the uncertainties of the extent of the credit problems continues to weigh on investors.

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