Can a Fed rate cut make credit flow?
An interest-rate move Wednesday could make some loans cheaper than at any time since 2003.
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However, at the moment, the biggest worry is about the economy. Layoffs are now starting to occur at a much faster pace. Consumers are pulling back – way back.Skip to next paragraph
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On Monday, the Commerce Department reported new home sales actually rose 2.7 percent in September. Housing analysts were cheered to see the inventory of new homes fall from 11.4 months to 10.4 months of supply. However, the improvement came at a cost – the median price declined by 9.1 percent from a year ago. Housing analysts pointed out that one-month numbers can be volatile since they are taken from a small sample.
"Going forward, sales will continue to drop because of falling house prices for existing homes, tighter credit, and a deteriorating economy," wrote Patrick Newport, US economist for IHS Global Insight in Lexington, Mass.
This week will start to provide economists with a better idea of how much the economy is falling.
On Wednesday, the government will report the durable goods orders for September. In August, they had their sharpest drop in two years. On Thursday, the government will release its first look at third-quarter gross domestic product. Economists anticipate it will show the economy declined by about 0.5 percent.
"This recession could have the dimension of 1981 to 1982. That was the deepest we have had in recent times," says Lyle Gramley, a senior economic adviser at Stanford Washington Research Group and a former governor of the Federal Reserve.
Mr. Gramley expects layoffs, which began in earnest in September, to start cascading. He anticipates that the unemployment rate, currently at 6.1 percent, may peak at somewhere between 8 and 9 percent, which would be the highest rate since 1982.
"People have a sense of foreboding; there is a sense everywhere that the economy is in big trouble," says Gramley.
Fed watchers expect the Fed, in its statement on Wednesday, to talk about the risk to growth in the economy, playing down inflation issues. In his recent testimony, Mr. Bernanke has talked about how commodity prices have fallen, which should relieve inflation pressures, which have been running at about a 5 percent annual rate.
On Monday, commodity prices continued to fall, with the price of oil dropping below $63 a barrel. Over the past two weeks, the average price of gasoline has fallen 50 cents a gallon nationally, according to GasPriceWatch.com. This should help consumers.
However, it will probably not be enough to help US retailers. "This will be a miserable Christmas season," predicts Gramley.