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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (6691)	8/5/2002 1:28:21 AM
From: Jon Koplik	Read Replies (1) \| Respond to of 33421

Double-Dip Recession Unlikely - Fed's Poole Last Updated: August 04, 2002 04:34 PM ET NEW ORLEANS (Reuters) - St. Louis Federal Reserve Bank President William Poole said on Sunday the odds the U.S. economy might fall back into recession given the stock market's recent woes were "very, very small."' "My own view is that the odds of a double dip recession are very, very small," Poole said in answer to a question after addressing a group of Southern state legislators. "The overall national picture is that the national economy is going to be recovering," he said, pointing to strength in home and auto sales, and the resilience of household spending. A spate of weak economic data last week raised concerns the fledgling recovery could stall and led some analysts to predict the Federal Reserve would cut interest rates before year-end. Still, most economists have said while the chances of a double-dip recession had risen, the Fed was more likely to hold its benchmark overnight lending rate at its current 40-year low of 1.75 percent for an extended period than to cut it further. "Markets are going through a period of adjustment that is not fundamentally related to monetary policy or what monetary policy can fix," Poole said, referring to the steep stock market slide that some believe has begun to cut into economic growth. Speaking with reporters following his speech, Poole was asked whether the United States might be looking at a prolonged period of sub-par growth. "I doubt it," he said. "The underlying trend of productivity growth in this country is solid, and I think we have a very vigorous vital market economy. I think in the long-run, the outlook is very favorable." The regional Fed bank chief, who does not have a vote on the central bank's interest-rate setting panel this year, also said he saw no signs of a credit crunch. A reluctance to lend was a factor behind the United States' slow recovery from the 1990-91 recession. STOCK MARKET BLUES In his speech, Poole noted that stock prices impact both business and consumer spending. However, he cautioned that it is the level of total household wealth, including the value of bonds and real estate, that is important when evaluating the so-called wealth effect -- that is, the degree to which asset prices might impact consumer spending. Federal Reserve Chairman Alan Greenspan has said rising home values had to a good degree offset the dampening impact of falling stocks. Poole also said the wealth effect appears to be spread out over time and is small relative to the effect of household income, which has been rising. In the end, he said the United States could benefit from the accounting and corporate governance scandals that have beat markets down to multiyear lows as reforms are put in place. "We will come out the other side of a current experience with accounting irregularities in a much stronger position than we entered it," he said. CAUSES FOR CONCERN But he warned of some potential clouds on the horizon that could lead to instability in financial markets, zeroing in on the heavy debt load of mortgage market giants Fannie Mae FNM.N and Freddie Mac FRE.N . The two so-called government-sponsored enterprises, or GSEs, had $1.3 trillion in debt outstanding at the end of last year and, according to Poole, had guaranteed another $1.8 trillion of mortgage-backed securities. "In the case of the GSEs, the massive scale of their liabilities could create a massive problem in the credit markets," Poole said. "If the market value of GSE debt were to fall sharply ... what would happen? I do not know, and neither does anyone else," he said. Fannie Mae and Freddie Mac, while shareholder-owned companies, were chartered by Congress to provide a deep and even flow of funds to mortgage markets, which they do by buying mortgages and repackaging them as securities for investors. Under their charters, the firms have credit lines with the U.S. Treasury, which -- although never tapped -- many think have contributed to a view in the market that the government would stand behind their massive debts. "I do not see any immediate risk of a GSE debt problem, but am not willing to assume that in different conditions in the future one could not occur," the St. Louis Fed chief said. Poole said the credit lines the GSEs have with the Treasury Department should be withdrawn, adding that they could be replaced by credit lines at commercial banks. In addition, he said the companies over a period of years should add to the amount of capital they hold. He said both Fannie Mae and Freddie Mac hold a level of capital "well below" what is required of banks. © Copyright Reuters 2002. All rights reserved.