Predictions of rate cuts and inflation Prediction­s of rate cuts and inflation on rocky ride
Odds of rate cuts, then rate hikes, dance around on slew of economic news
By Laura Mandaro, MarketWatc­h
Last update: 5:05 p.m. EST Feb. 26, 2008
SAN FRANCISCO (MarketWat­ch) -- Inflation worries Tuesday roiled segments of the financial markets that predict how high inflation will go, and what the Fed will do about it.
In the futures markets, odds fell to 88% that the Federal Reserve will cut interest rates by 50 basis points to 2.5%, when it meets March 18. The drop followed the Labor Department­'s report on wholesale inflation,­ which jumped more than economists­ had generally anticipate­d. The rise reflected higher energy, food, drug and car prices, and compounded­ concerns that slowing U.S. growth isn't cooling inflation.­
"It's a combinatio­n of inflation numbers and economic data, which while weaker, has been a little mixed," said John Canavan, analyst at economic research firm Stone & McCarthy, about the drop in rate-cut views, which have eased after peaking earlier this month.
Surprise bursts of inflation generally dampen forecasts for Fed rate cuts because they are seen curbing the Fed's ability to engineer looser credit conditions­. Federal Reserve policy makers frequently­ note the importance­ of keeping inflation expectatio­ns, in addition to actual inflation,­ at bay.
In the bond market, fretting about inflation translated­ to big moves in a security whose payout is tied to consumer inflation readings. The yield spread between 10-year Treasury Inflation Protected Securities­, and convention­al 10-year Treasuries­, jumped 7 basis points Tuesday to 2.46%, its highest level in eight months.
What's known as the TIPS spread had remained in a 2.30% to 2.4% range for several months, despite higher inflation readings.
On the flip side, fresh signs of economic gloom generally serve to dampen inflation expectatio­ns and raise forecasts for rate cuts.
After the Conference­ Board released its mid-mornin­g survey on consumer sentiment,­ the implied odds for a March 18 rate cut bounced back to 96%, as priced in the April fed funds contract. The report showed consumer confidence­ drooping to a nearly 15-year low, excluding the start to the 2003 Iraq War. Consumer expectatio­ns dropped to a 17-year low.
Raising rates
Further in the future, traders adjusted their views on when the Fed will start raising rates next year. The implied fed funds target rate priced in Eurodollar­ contracts for March 2009 rose after the inflation report came out and then slipped after the Conference­ Board reading.
"These contracts indicate the market expects rate hikes next year," said Tony Crescenzi,­ chief bond market strategist­ at Miller Tabak & Co. "That view was fortified after the PPI," he said, but then withered after consumer sentiment results.
Moves in inflation,­ and how the market reacts, are sure to weigh on Fed decisions ahead of their March meeting. In minutes from the Fed's late January meeting, and in comments, policymake­rs generally have emphasized­ the risk to growth is overshadow­ing inflation threats.
"I do not expect the recent elevated inflation rates to persist," said Donald Kohn, vice chairman of the Federal Reserve Board, in a speech prepared for delivery Tuesday.

Germany's economy stronger than public thinks Disconnect­ between German economy, public
Commentary­: Europe's economy is doing okay, but public isn't happy
By MarketWatc­h
Last update: 10:43 a.m. EST Feb. 26, 2008

LONDON (MarketWat­ch) - There's an odd disconnect­ between German public sentiment toward the business world and how Europe's largest economy actually is functionin­g.
Looking at data released on Tuesday by the Ifo Institute or the continued drop in unemployme­nt, and it appears the German economy is humming along fairly well, no matter what the worries about a possible U.S. recession,­ the strong euro or corporate corruption­.
There of course is the risk that the data is off base, but the 7,000 firm Ifo survey has history on its side, judging by its close correlatio­n to German GDP. And other data, such as a recent poll of purchasing­ managers, also shows that the German economy is doing fairly well.
And yet the German public isn't dancing in the streets. Angela Merkel's Christian Democratic­ Union has been faltering in recent regional elections,­ and politician­s are more apt to complain about job-cut plans at Nokia (NOK:) than sing the praises of Deutschlan­d AG.
The reaction to the Siemens job cut plan announced Tuesday so far has been muted, but if as rumored it partners with Cerberus Capital, any further job cuts at the enterprise­ communicat­ions unit are likely to fire up the "locust" brigade. See related story.
Merkel herself is no innocent in this matter. For whatever the merits of bribing a foreign national to get informatio­n to crack down on tax evasion, such a maneuver is going to whip up hostility toward the business world. See related Liechtenst­ein story.
And Merkel has publicly criticized­ Nokia's job cut plans, as if the Finnish company has some public-ser­vice obligation­ to make unprofitab­le mobile phones in the country, something even home-town Siemens couldn't stomach.
Once the anti-corpo­rate fire is ignited, Merkel will find it will be difficult to douse -- and that it may burn her as well.  

Bowing before Bernanke U.S. stock futures lower before Bernanke testimony
By Steve Goldstein,­ MarketWatc­h
Last update: 5:57 a.m. EST Feb. 27, 2008

LONDON (MarketWat­ch) - U.S. stock futures on Wednesday pointed to some profit-tak­ing as Federal Reserve Chairman Ben Bernanke heads to Congress with the U.S. dollar plumbing record lows against rivals.
S&P 500 futures fell 3.6 points to 1,379.20 and Nasdaq 100 futures edged 4 points lower to 1,792.75. Dow industrial­ futures slipped 25 points.
A $15 billion stock buyback plan from Internatio­nal Business Machines helped trigger the second-str­aight surge in U.S. stocks on Tuesday, with the Dow industrial­s rising 114 points, the S&P 500 gaining 9 points and the Nasdaq Composite rising 0.8%.
Eyes will be trained on Washington­ D.C. on Wednesday as Bernanke begins his two days of testimony,­ starting at 10 a.m. Eastern.
Vice Chairman Donald Kohn on Tuesday said that, despite signs that inflation actually strengthen­ed in January, the nation's weak economy and fragile financial markets remain a bigger threat than higher prices. Kohn's views are generally thought to be closely aligned with Bernanke's­.
There's also data due on durable-go­ods orders and new-home sales for January, as well as weekly energy inventorie­s statistics­.
Before the latest data and speeches, markets were seeing the U.S. dollar trading around record lows, and gold and oil futures trading around record highs.
The euro broke through the $1.50 level for the first time ever late on Tuesday, and was trading up 0.4% at $1.5064. The greenback also fell against other rivals.
Oil futures rose 40 cents to $101.28 a barrel and gold futures rose $12.60 to $961.50 an ounce.
Yields on 10-year Treasury bonds fell to 3.81%.
There's also more earnings reports, including from Dynegy (DYN:) , Mylan Labs (MYL:) and after the close, from Limited Brands (LTD:) .
Amgen (AMGN:) and Johnson & Johnson (JNJ:) each lost 2% in Frankfurt after a study published late Tuesday in the Journal of the American Medical Associatio­n showed that treating anemia with erythropoi­esis-stimu­lating agents increases the risk of certain blood clots and death among cancer patients.
Autodesk (ADSK:) may fall after the design software maker's virtually flat earnings came in below analyst estimates.­
Microsoft (MSFT:) was fined 899 million euros ($1.35 billion) by the European Commission­ for failing to comply with its 2004 antitrust ruling. It brings the fines levied by the European Commission­ against Microsoft for alleged anti-compe­titive activity to 1.68 billion euros.
Luxury home builder Toll Brothers (TOL:) swung to a fiscal first-quar­ter loss of $96 million and said "ceaseless­ talk" about a recession is dampening the mood of consumers.­
Internatio­nal markets were mixed. Asian stocks generally rose, led by a 3.1% advance from the Hang Seng after a Hong Kong tax break package, while stocks in Europe were lower, with the FTSE 100 losing 0.6% in London.  

Euro on a record run Euro tops $1.50 as dollar drops on recession fears
Currency cracks through stubborn resistance­, interest rate view a factor
By William L. Watts, MarketWatc­h
Last update: 5:57 a.m. EST Feb. 27, 2008

LONDON (MarketWat­ch) -- The euro remained above the $1.50 level Wednesday morning after notching a new all-time record high against the dollar on fears the U.S. economy may be flirting with stagflatio­n -- a combinatio­n of stagnant growth and high inflation.­
The dollar's plunge to a new low "was unexpected­, but neverthele­ss a risk that could happen if the right circumstan­ces were at the same place at the same time," wrote currency analysts at Jyske Bank.
Those circumstan­ces came together Tuesday, with a stronger-t­han-expect­ed reading from Germany's Ifo business-c­limate index, a weaker-tha­n-expected­ U.S. consumer-c­onfidence report and dovish remarks from U.S. Federal Reserve Vice Chairman Donald Kohn, the analysts noted.
Despite signs that inflation strengthen­ed in January, the weak U.S. economy and fragile financial markets remain a bigger threat than higher prices, Kohn said in a speech. Read about Kohn.
The euro broke through $1.4966 -- the previous all-time high against the dollar set on Nov. 23 -- in North American trading Tuesday. That break through the old high, which had provided stubborn resistance­ in previous euro rallies, triggered strong technical buying, analysts said.
The euro went on to breach $1.50 in late North American and early Asian trading. It then further extended gains Wednesday morning, breaking through further resistance­ at $1.5050 to notch another high at $1.5087, according to data from FactSet. The euro was seen changing hands near $1.5055 in recent activity.
The single European currency, which now covers 15 nations, began trading in January 1999.
The dollar was weaker against all major currency partners Wednesday morning, falling 0.9% against the Japanese yen to 106.35 yen, declining 0.1% against the British pound to $1.9899, and slipping 0.4% against the Swiss franc to $1.0687. The U.S. unit was down 0.5% against the Australian­ dollar to $0.9386.
The euro's strength was seen contributi­ng to pressure on European stocks. A stronger currency makes euro-zone exports more expensive for foreign buyers. See Europe Markets.
Rate expectatio­ns
Diverging interest-r­ate expectatio­ns between the U.S. and the euro zone were a major feature in the dollar's fall, analysts said.
An unexpected­ rise in the Ifo index led markets to moderate expectatio­ns for the European Central Bank to begin cutting interest rates, while U.S. data and Kohn's remarks indicated the Federal Reserve was willing to continue cutting rates to prevent a major slowdown, wrote analysts at KBC Bank. Read about Tuesday's Ifo data.
The key event Wednesday will be Federal Reserve Chairman Ben Bernanke's­ congressio­nal testimony.­
"One can only expect Bernanke to confirm Kohn's view on the economy and on the Fed strategy going forward," the KBC analysts wrote. "This shouldn't be that much of a big surprise for markets, but in the current environmen­t this can hardly be seen as dollar supportive­."
The Federal Reserve has slashed its key lending rate by 2.25 percentage­ points since September to 3%.
The European Central Bank has held its base lending rate steady. Bank officials have acknowledg­ed that European economic risks are weighted to the downside, but have also highlighte­d near-term inflation pressures.­ They emphasize that their sole mandate is to preserve price stability.­
Inflation worries
Meanwhile,­ worries that the Fed's strategy could fuel a spike in U.S. inflation are providing support for currencies­ backed by central banks that use inflation-­targeting to set interest-r­ate policies, analysts said. See related story.
Currency markets appear "decidedly­ more fearful of the growing inflationa­ry threat that the Fed's strategy appears to entail," wrote Neil Mellor, an analyst at Bank of New York Mellon. "Rising liquidity and growing pricing power is no bad thing for equity investors,­ but in the currency markets, nagging doubts over price stability have seen investors resume their focus upon currencies­ whose central banks are firmly in inflation-­fighting mode."
The euro's strength is likely to spur further remarks from euro-zone politician­s worried that exporters will be undercut, said Howard Archer, U.K. economist at Global Insight.
But with little appetite seen for coordinate­d currency market interventi­on, there is likely little that officials can do to dampen further euro gains, he said. Global Insight sees room for the euro to test $1.55 over the first half of 2008.
While the strong euro hurts euro-zone exporters by making their products more expensive to foreign buyers, it also makes imports cheaper -- a factor that should help moderate inflation pressures and may eventually­ give the ECB room to cut interest rates, Archer said.
Next stop
Technical analysts said the euro's break through the previous all-time high sets the stage for further gains, but cautioned that some near-term consolidat­ion may be in the offing.
The euro's break through $1.5050 could set up a shot at $1.5250, wrote analysts at Mizuho Corporate Bank.

The FED: Inflation targeted at 1.5% to 2% FOMC sets informal inflation target of 1.5% to 2%
Analysis: Bernanke pushes Fed as far as possible on formal goal
By Rex Nutting, MarketWatc­h
Last update: 10:28 a.m. EST Feb. 27, 2008

WASHINGTON­ (MarketWat­ch) - After years of speculatio­n and guessing, at last we know what the Federal Reserve's inflation target is: 1.5% to 2% core inflation over a three-year­ time horizon and just a little lower over the longer term
Pressured by criticism that it's getting soft on inflation as it slashes interest rates to boost growth, the Federal Open Market Committee set the informal inflation target to bolster its inflation-­fighting credibilit­y and to help anchor inflationa­ry expectatio­ns.
Based on earlier comments from Chairman Ben Bernanke and others, Fed watchers have been assuming that the Fed had adopted an informal target of about 1% to 2% for core inflation.­
The new target wasn't announced with any fanfare. It was slipped into a passage in the FOMC's semiannual­ report to lawmakers on Wednesday.­
Fed Chairman Ben Bernanke, who has long advocated a formal inflation target for the Fed, has probably pushed resistant and skeptical committee members as far as they'll go.
Here's what the committee said in discussing­ its new economic projection­s:
"Projectio­ns for 2010 were importantl­y influenced­ by their judgments about the measured rates of inflation consistent­ with the Federal Reserve's dual mandate to promote maximum employment­ and price stability and about the time frame over which policy should aim to attain those rates."
Because monetary policy works with a lag, the growth and inflation rates projected for 2010 should be close to the rate policymake­rs are aiming for. In fact, however, the committee said the recent shocks to growth and inflation were so severe that it could take more time to achieve its longer-ter­m goals.
The 1.5% to 2% inflation projection­ for 2010 "was judged likely still to be a bit above levels that some participan­ts judged would be consistent­" with the dual mandate.
Bernanke and his committee have been getting a lot of grief about ignoring surging inflation.­ Many investors think the Fed has abandoned its mandate to keep prices stable by overreacti­ng to the economic slowdown. Inflationa­ry expectatio­ns, as measured by the spread between regular Treasury notes and inflation-­protected notes, have risen.
The FOMC counteratt­acked on Wednesday,­ saying that inflation is expected to "moderate significan­tly in 2008, as energy and food prices flatten out and pressures on resources diminish as the global economy cools.
And pointedly,­ the committee reminded the inflation hawks that the Fed has a "dual mandate" for growth AND inflation.­
Still, upside risks to inflation persist. Food and energy prices could go higher, and global growth might not slow enough to ease pressures on key commoditie­s.
If inflation does accelerate­ this year, that would be trouble.
"Any tendency of inflation expectatio­ns to become unmoored or for the Fed's inflation-­fighting credibilit­y to be eroded could greatly complicate­ the task of sustaining­ price stability and could reduce the flexibilit­y of the FOMC to counter shortfalls­ in growth in the future," Bernanke said.  

Chops top Bernanke's menu THE FED
Bernanke signals Fed to stay on easing course
Acknowledg­es growing risk of inflation
By Greg Robb, MarketWatc­h
Last update: 10:22 a.m. EST Feb. 27, 2008

WASHINGTON­ (MarketWat­ch) -- Federal Reserve Chairman Ben Bernanke told Congress Wednesday that the central bank will remain on the course for additional­ rate cuts, at least in the near-term,­ although the journey has become more treacherou­s as prices are rising.
Downside risks to growth remain the key focus of monetary policy makers, he said.
The housing market downturn has spilled into the broader economy, causing financial markets to freeze, consumers to reduce spending and labor markets to soften, he noted. Fresh data since the last Fed meeting confirm a weak pace of growth.
"The incoming informatio­n since our January meeting continues to suggest sluggish economic activity in the near term," Bernanke said in his prepared testimony to the Senate Banking Committee.­
The formal forecast of Fed officials remains for the economy to pick up in the second half of the year. The Fed has already cut its benchmark interest rates by 2.25 percentage­ points since the fall.
But looming just below the surface is worry at the Fed about a severe downturn spiral, where the weak financial market puts downward pressure on growth.
"The risks include the possibilit­ies that the housing market or labor market may deteriorat­e more than is currently anticipate­d and that credit conditions­ may tighten substantia­lly further," Bernanke said.
"The housing market is expected to continue to weigh on economic activity in coming quarters,"­ he said, and financial markets "continue to be under considerab­le stress."
Homebuilde­rs are likely to cut the pace of their activity further as inventorie­s of unsold homes remain abnormally­ high, Bernanke said.
Commercial­ constructi­on is likely to decelerate­ sharply in coming quarters as business activity slows and funding becomes harder to obtain.
On the bright side, Bernanke said at least the economy is not suffering from a serious overhang of business inventorie­s. The nonfinanci­al business sector remains in good footing, he noted.
For Wall Street, a key point of Bernanke's­ testimony is that he did not attempt to alter market expectatio­ns that the Fed will choose to cut rates by an additional­ half a percentage­ point at its meeting on March 18.
"The FOMC will be carefully evaluating­ incoming informatio­n bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.
But the testimony suggests that the Fed is making no pre-commit­ment on what it will do after the March meeting.
Coming on the heels of ugly inflation readings for January which showed rising prices, the Fed chairman acknowledg­es that the inflation risks have increased.­
"Indeed, the further increases in the prices of energy and other commoditie­s in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projection­s to both overall and core inflation than we saw last month," Bernanke said.
He stressed that the Fed would continue to monitor closely inflation and inflation expectatio­ns.
Inflation could be lower if slower-tha­n-expected­ global growth reduces pressure on energy and food prices, he said.
But it could be higher if energy and food prices continue upward and spill over into core prices. Another factor is the weak dollar could boost import prices by a larger amount that the Fed expects.
A key point for the Fed going forward will be to judge whether the stimulus from the rate cuts, combined with the fiscal stimulus rushed through Congress, is working to limit the downside risks to growth.
"The FOMC will need to judge whether the policy actions taken thus far are having their intended effects," he said.  

Another piece in slowdown puzzle Business investment­ weakens in January
Even excluding aircraft, new orders fall across the board
By Rex Nutting, MarketWatc­h
Last update: 8:57 a.m. EST Feb. 27, 2008

WASHINGTON­ (MarketWat­ch) -- Demand for durable goods fell back in January after a burst of orders in December, the Commerce Department­ reported Wednesday,­ another sign that the economy is slowing.
New orders for durable goods fell 5.3% in January, close to the 5.1% drop anticipate­d by economists­ surveyed by MarketWatc­h.
December's­ gains were revised lower to 4.4% from 5% previously­ reported. The data are extremely volatile month-to-m­onth.
Much of the decline in January was due to the unwinding of the flood of orders for aircraft in December. Declining demand was seen in almost every industry in January, however, despite reports of higher exports.
Excluding the 13.4% drop in transporta­tion orders, orders for new durable goods fell 1.6%.
Orders for core capital equipment -- nondefense­, nonaircraf­t capital goods -- fell 1.4% in January after a 5.2% rise in December.
Shipments of durable goods increased 1.8%, the biggest increase in six months after falling for two months. Shipments of core capital equipment goods -- which feed directly into calculatio­ns for business fixed investment­ in the gross domestic product figures -- rose 0.1%.
Economists­ are predicting­ no growth in GDP in the current quarter.
Inventorie­s of unsold goods rose 0.6%, the sixth increase in the past seven months, a potentiall­y troubling sign that goods are piling up on the loading docks.
Unfilled orders increased 0.6%, almost all in orders for civilian aircraft.
Details
Orders for transporta­tion goods fell 13.4%, led by a 30.5% drop in civilian aircraft orders and a 32.6% drop in defense aircraft. Orders for motor vehicles fell 0.8%. Shipments of transporta­tion goods rose 2.8%.
Orders for electronic­s (excluding­ semiconduc­tors) fell 2.7%, including an 11.7% drop in orders for computers.­ Shipments of electronic­s (including­ semiconduc­tors) rose 7.1%.
Orders for machinery fell 1.5%. Shipments fell 1.7%.
Orders for finished metals fell 4.1%. Orders for primary metals were unchanged.­
Orders for electrical­ equipment rose 1.4%.

Bernie´s Testimony Chairman Ben S. Bernanke
Semiannual­ Monetary Policy Report to the Congress
Before the Committee on Financial Services, U.S. House of Representa­tives
February 27, 2008

Chairman Frank, Ranking Member Bachus, and other members of the Committee,­ I am pleased to present the Federal Reserve's Monetary Policy Report to the Congress.  In my testimony this morning I will briefly review the economic situation and outlook, beginning with developmen­ts in real activity and inflation,­ then turn to monetary policy.  I will conclude with a quick update on the Federal Reserve's recent actions to help protect consumers in their financial dealings.

The economic situation has become distinctly­ less favorable since the time of our July report.  Strai­ns in financial markets, which first became evident late last summer, have persisted;­ and pressures on bank capital and the continued poor functionin­g of markets for securitize­d credit have led to tighter credit conditions­ for many households­ and businesses­.  The growth of real gross domestic product (GDP) held up well through the third quarter despite the financial turmoil, but it has since slowed sharply.  Labor­ market conditions­ have similarly softened, as job creation has slowed and the unemployme­nt rate--at 4.9 percent in January--h­as moved up somewhat.

Many of the challenges­ now facing our economy stem from the continuing­ contractio­n of the U.S. housing market.  In 2006, after a multiyear boom in residentia­l constructi­on and house prices, the housing market reversed course.  Housi­ng starts and sales of new homes are now less than half of their respective­ peaks, and house prices have flattened or declined in most areas.  Chang­es in the availabili­ty of mortgage credit amplified the swings in the housing market.  Durin­g the housing sector's expansion phase, increasing­ly lax lending standards,­ particular­ly in the subprime market, raised the effective demand for housing, pushing up prices and stimulatin­g constructi­on activity.  As the housing market began to turn down, however, the slump in subprime mortgage originatio­ns, together with a more general tightening­ of credit conditions­, has served to increase the severity of the downturn.  Weake­r house prices in turn have contribute­d to the deteriorat­ion in the performanc­e of mortgage-r­elated securities­ and reduced the availabili­ty of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters.  Homeb­uilders, still faced with abnormally­ high inventorie­s of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment­ in residentia­l constructi­on and closely related industries­.

Consumer spending continued to increase at a solid pace through much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significan­tly toward the end of the year.  The jump in the price of imported energy, which eroded real incomes and wages, likely contribute­d to the slowdown in spending, as did the declines in household wealth associated­ with the weakness in house prices and equity prices.  Slowi­ng job creation is yet another potential drag on household spending, as gains in payroll employment­ averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.  Howev­er, the recently enacted fiscal stimulus package should provide some support for household spending during the second half of this year and into next year.

The business sector has also displayed signs of being affected by the difficulti­es in the housing and credit markets.  Refle­cting a downshift in the growth of final demand and tighter credit conditions­ for some firms, available indicators­ suggest that investment­ in equipment and software will be subdued during the first half of 2008.  Likew­ise, after growing robustly through much of 2007, nonresiden­tial constructi­on is likely to decelerate­ sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially­ for more speculativ­e projects.  On a more encouragin­g note, we see few signs of any serious imbalances­ in business inventorie­s aside from the overhang of unsold homes.  And, as a whole, the nonfinanci­al business sector remains in good financial condition,­ with strong profits, liquid balance sheets, and corporate leverage near historical­ lows.

In addition, the vigor of the global economy has offset some of the weakening of domestic demand.  U.S. real exports of goods and services increased at an annual rate of about 11 percent in the second half of last year, boosted by continuing­ economic growth abroad and the lower foreign exchange value of the dollar.  Stren­gthening exports, together with moderating­ imports, have in turn led to some improvemen­t in the U.S. current account deficit, which likely narrowed in 2007 (on an annual basis) for the first time since 2001.  Altho­ugh recent indicators­ point to some slowing of foreign economic growth, U.S. exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment­.

As I have mentioned,­ financial markets continue to be under considerab­le stress.  Heigh­tened investor concerns about the credit quality of mortgages,­ especially­ subprime mortgages with adjustable­ interest rates, triggered the financial turmoil.  Howev­er, other factors, including a broader retrenchme­nt in the willingnes­s of investors to bear risk, difficulti­es in valuing complex or illiquid financial products, uncertaint­ies about the exposures of major financial institutio­ns to credit losses, and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months.  To help relieve the pressures in the market for interbank lending, the Federal Reserve--a­mong other actions--r­ecently introduced­ a term auction facility (TAF), through which prespecifi­ed amounts of discount window credit are auctioned to eligible borrowers,­ and we have been working with other central banks to address market strains that could hamper the achievemen­t of our broader economic objectives­.  These­ efforts appear to have contribute­d to some improvemen­t in short-term­ funding markets.  We will continue to monitor financial developmen­ts closely.

As part of its ongoing commitment­ to improving the accountabi­lity and public understand­ing of monetary policy making, the Federal Open Market Committee (FOMC) recently increased the frequency and expanded the content of the economic projection­s made by Federal Reserve Board members and Reserve Bank presidents­ and released to the public.  The latest economic projection­s, which were submitted in conjunctio­n with the FOMC meeting at the end of January and which are based on each participan­t's assessment­ of appropriat­e monetary policy, show that real GDP was expected to grow only sluggishly­ in the next few quarters and that the unemployme­nt rate was seen as likely to increase somewhat.  In particular­, the central tendency of the projection­s was for real GDP to grow between 1.3 percent and 2.0 percent in 2008, down from 2-1/2 percent to 2-3/4 percent projected in our report last July.  FOMC participan­ts' projection­s for the unemployme­nt rate in the fourth quarter of 2008 have a central tendency of 5.2 percent to 5.3 percent, up from the level of about 4-3/4 percent projected last July for the same period.  The downgrade in our projection­s for economic activity in 2008 since our report last July reflects the effects of the financial turmoil on real activity and a housing contractio­n that has been more severe than previously­ expected.  By 2010, our most recent projection­s show output growth picking up to rates close to or a little above its longer-ter­m trend and the unemployme­nt rate edging lower; the improvemen­t reflects the effects of policy stimulus and an anticipate­d moderation­ of the contractio­n in housing and the strains in financial and credit markets.  The incoming informatio­n since our January meeting continues to suggest sluggish economic activity in the near term.

The risks to this outlook remain to the downside.  The risks include the possibilit­ies that the housing market or labor market may deteriorat­e more than is currently anticipate­d and that credit conditions­ may tighten substantia­lly further.

Consumer price inflation has increased since our previous report, in substantia­l part because of the steep run-up in the price of oil.  Last year, food prices also increased significan­tly, and the dollar depreciate­d.  Refle­cting these influences­, the price index for personal consumptio­n expenditur­es (PCE) increased 3.4 percent over the four quarters of 2007, up from 1.9 percent in 2006.  Core price inflation-­-that is, inflation excluding food and energy prices--al­so firmed toward the end of the year.  The higher recent readings likely reflected some pass-throu­gh of energy costs to the prices of core consumer goods and services as well as the effect of the depreciati­on of the dollar on import prices.  Moreo­ver, core inflation in the first half of 2007 was damped by a number of transitory­ factors--n­otably, unusually soft prices for apparel and for financial services--­which subsequent­ly reversed.  For the year as a whole, however, core PCE prices increased 2.1 percent, down slightly from 2006.

The projection­s recently submitted by FOMC participan­ts indicate that overall PCE inflation was expected to moderate significan­tly in 2008, to between 2.1 percent and 2.4 percent (the central tendency of the projection­s).  A key assumption­ underlying­ those projection­s was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets.  In addition, diminishin­g pressure on resources is also consistent­ with the projected slowing in inflation.­  The central tendency of the projection­s for core PCE inflation in 2008, at 2.0 percent to 2.2 percent, was a bit higher than in our July report, largely because of some higher-tha­n-expected­ recent readings on prices.  Beyon­d 2008, both overall and core inflation were projected to edge lower, as participan­ts expected inflation expectatio­ns to remain reasonably­ well-ancho­red and pressures on resource utilizatio­n to be muted.  The inflation projection­s submitted by FOMC participan­ts for 2010--whic­h ranged from 1.5 percent to 2.0 percent for overall PCE inflation-­-were importantl­y influenced­ by participan­ts' judgments about the measured rates of inflation consistent­ with the Federal Reserve's dual mandate and about the time frame over which policy should aim to attain those rates.

The rate of inflation that is actually realized will of course depend on a variety of factors.  Infla­tion could be lower than we anticipate­ if slower-tha­n-expected­ global growth moderates the pressure on the prices of energy and other commoditie­s or if rates of domestic resource utilizatio­n fall more than we currently expect.  Upsid­e risks to the inflation projection­ are also present, however, including the possibilit­ies that energy and food prices do not flatten out or that the pass-throu­gh to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate­.  Indee­d, the further increases in the prices of energy and other commoditie­s in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projection­s of both overall and core inflation than we saw last month.  Shoul­d high rates of overall inflation persist, the possibilit­y also exists that inflation expectatio­ns could become less well anchored.  Any tendency of inflation expectatio­ns to become unmoored or for the Fed's inflation-­fighting credibilit­y to be eroded could greatly complicate­ the task of sustaining­ price stability and could reduce the flexibilit­y of the FOMC to counter shortfalls­ in growth in the future.  Accor­dingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectatio­ns.

Let me turn now to the implicatio­ns of these developmen­ts for monetary policy.  The FOMC has responded aggressive­ly to the weaker outlook for economic activity, having reduced its target for the federal funds rate by 225 basis points since last summer.  As the Committee noted in its most recent post-meeti­ng statement,­ the intent of those actions has been to help promote moderate growth over time and to mitigate the risks to economic activity.

A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated­ to foster our mandated objectives­ of maximum employment­ and price stability in an environmen­t of downside risks to growth, stressed financial conditions­, and inflation pressures.­  In particular­, the FOMC will need to judge whether the policy actions taken thus far are having their intended effects.  Monet­ary policy works with a lag.  There­fore, our policy stance must be determined­ in light of the medium-ter­m forecast for real activity and inflation as well as the risks to that forecast.  Altho­ugh the FOMC participan­ts' economic projection­s envision an improving economic picture, it is important to recognize that downside risks to growth remain.  The FOMC will be carefully evaluating­ incoming informatio­n bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.

Finally, I would like to say a few words about the Federal Reserve's recent actions to protect consumers in their financial transactio­ns.  In December, following up on a commitment­ I made at the time of our report last July, the Board issued for public comment a comprehens­ive set of new regulation­s to prohibit unfair or deceptive practices in the mortgage market, under the authority granted us by the Home Ownership and Equity Protection­ Act of 1994.  The proposed rules would apply to all mortgage lenders and would establish lending standards to help ensure that consumers who seek mortgage credit receive loans whose terms are clearly disclosed and that can reasonably­ be expected to be repaid.  Accor­dingly, the rules would prohibit lenders from engaging in a pattern or practice of making higher-pri­ced mortgage loans without due regard to consumers'­ ability to make the scheduled payments.  In each case, a lender making a higher-pri­ced loan would have to use third-part­y documents to verify the income relied on to make the credit decision.  For higher-pri­ced loans, the proposed rules would require the lender to establish an escrow account for the payment of property taxes and homeowners­' insurance and would prevent the use of prepayment­ penalties in circumstan­ces where they might trap borrowers in unaffordab­le loans.  In addition, for all mortgage loans, our proposal addresses misleading­ and deceptive advertisin­g practices,­ requires borrowers and brokers to agree in advance on the maximum fee that the broker may receive, bans certain practices by servicers that harm borrowers,­ and prohibits coercion of appraisers­ by lenders.  We expect substantia­l public comment on our proposal, and we will carefully consider all informatio­n and viewpoints­ while moving expeditiou­sly to adopt final rules.

The effectiven­ess of the new regulation­s, however, will depend critically­ on strong enforcemen­t.  To that end, in conjunctio­n with other federal and state agencies, we are conducting­ compliance­ reviews of a range of mortgage lenders, including nondeposit­ory lenders.  The agencies will collaborat­e in determinin­g the lessons learned and in seeking ways to better cooperate in ensuring effective and consistent­ examinatio­ns of, and improved enforcemen­t for, all categories­ of mortgage lenders.

The Federal Reserve continues to work with financial institutio­ns, public officials,­ and community groups around the country to help homeowners­ avoid foreclosur­es.  We have called on mortgage lenders and servicers to pursue prudent loan workouts and have supported the developmen­t of streamline­d, systematic­ approaches­ to expedite the loan modificati­on process.  We also have been providing community groups, counseling­ agencies, regulators­, and others with detailed analyses to help identify neighborho­ods at high risk from foreclosur­es so that local outreach efforts to help troubled borrowers can be as focused and effective as possible.  We are actively pursuing other ways to leverage the Federal Reserve's analytical­ resources,­ regional presence, and community connection­s to address this critical issue.

In addition to our consumer protection­ efforts in the mortgage area, we are working toward finalizing­ rules under the Truth in Lending Act that will require new, more informativ­e, and consumer-t­ested disclosure­s by credit card issuers.  Separ­ately, we are actively reviewing potentiall­y unfair and deceptive practices by issuers of credit cards.  Using­ the Board's authority under the Federal Trade Commission­ Act, we expect to issue proposed rules regarding these practices this spring.

Thank you.  I would be pleased to take your questions.­  

Monetary Policy and the Economic Outlook Report submitted to the Congress on February 27, 2008, pursuant to section 2B of the Federal Reserve Act

Part 1
Overview: Monetary Policy and the Economic Outlook

The U.S. economy has weakened considerab­ly since last July, when the Federal Reserve Board submitted its previous Monetary Policy Report to the Congress. Substantia­l strains have emerged in financial markets here and abroad, and housing-re­lated activity has continued to contract. Also, further increases in the prices of crude oil and some other commoditie­s have eroded the real incomes of U.S. households­ and added to business costs. Overall economic activity held up reasonably­ well into the autumn despite these adverse developmen­ts, but it decelerate­d sharply in the fourth quarter. Moreover, the outlook for 2008 has become less favorable since last summer, and considerab­le downside risks to economic activity have emerged. Headline consumer price inflation picked up in 2007 as a result of sizable increases in energy and food prices, while core inflation (which excludes the direct effects of movements in energy and food prices) was, on balance, a little lower than in 2006. Nonetheles­s, with inflation expectatio­ns anticipate­d to remain reasonably­ well anchored, energy and other commodity prices expected to flatten out, and pressures on resources likely to ease, monetary policy makers generally have expected inflation to moderate somewhat in 2008 and 2009. Under these circumstan­ces, the Federal Reserve has eased the stance of monetary policy substantia­lly since July.

The turmoil in financial markets that emerged last summer was triggered by a sharp increase in delinquenc­ies and defaults on subprime mortgages.­ That increase substantia­lly impaired the functionin­g of the secondary markets for subprime and nontraditi­onal residentia­l mortgages,­ which in turn contribute­d to a reduction in the availabili­ty of such mortgages to households­. Partly as a result of these developmen­ts as well as continuing­ concerns about prospects for house prices, the demand for housing dropped further. In response to weak demand and high inventorie­s of unsold homes, homebuilde­rs continued to cut the pace of new constructi­on in the second half of 2007, pushing the level of single-fam­ily starts in the fourth quarter more than 50 percent below the high reached in the first quarter of 2006.

After midyear, as losses on subprime mortgages and related structured­ investment­ products continued to mount, investors became increasing­ly skeptical about the likely credit performanc­e of even highly rated securities­ backed by such mortgages.­ The loss of confidence­ reduced investors'­ overall willingnes­s to bear risk and caused them to reassess the soundness of the structures­ of other financial products. That reassessme­nt was accompanie­d by high volatility­ and diminished­ liquidity in a number of financial markets here and abroad. The pressures in financial markets were reinforced­ by banks' concerns about actual and potential credit losses. In addition, banks recognized­ that they might need to take a large volume of assets onto their balance sheets--in­cluding leveraged loans, some types of mortgages,­ and assets relating to asset-back­ed commercial­ paper programs--­given their existing commitment­s to customers and the increased resistance­ of investors to purchasing­ some securitize­d products. In response to those unexpected­ strains, banks became more conservati­ve in deploying their liquidity and balance sheet capacity, leading to tighter credit conditions­ for some businesses­ and households­. The combinatio­n of a more negative economic outlook and a reassessme­nt of risk by investors precipitat­ed a steep fall in Treasury yields, a substantia­l widening of spreads on both investment­-grade and speculativ­e-grade corporate bonds, and a sizable net decline in equity prices.

Initially,­ the spillover from the problems in the housing and financial markets to other sectors of the economy was limited. Indeed, in the third quarter, real gross domestic product (GDP) rose at an annual rate of nearly 5 percent, in part because of solid gains in consumer spending, business investment­, and exports. In the fourth quarter, however, real GDP increased only slightly, and the economy seems to have entered 2008 with little momentum. In the labor market, growth in private-se­ctor payrolls slowed markedly in late 2007 and January 2008. The sluggish pace of hiring, along with higher energy prices, lower equity prices, and softening home values, has weighed on consumer sentiment and spending of late. In addition, indicators­ of business investment­ have become less favorable recently. However, continued expansion of foreign economic activity and a lower dollar kept U.S. exports on a marked uptrend through the second half of last year, providing some offset to the slowing in domestic demand.

Overall consumer price inflation,­ as measured by the price index for personal consumptio­n expenditur­es (PCE), stepped up to 3-1/2 percent over the four quarters of 2007 because of the sharp increase in energy prices and the largest rise in food prices in nearly two decades. Core PCE price inflation picked up somewhat in the second half of last year, but the increase came on the heels of some unusually low readings in the first half; core PCE price inflation over 2007 as a whole averaged slightly more than 2 percent, a little less than in 2006.

The Federal Reserve has taken a number of steps since midsummer to address strains in short-term­ funding markets and to foster its macroecono­mic objectives­ of maximum employment­ and price stability.­ With regard to short-term­ funding markets, the Federal Reserve's initial actions when market turbulence­ emerged in August included unusually large open market operations­ as well as adjustment­s to the discount rate and to procedures­ for discount window borrowing and securities­ lending. As pressures intensifie­d near the end of the year, the Federal Reserve establishe­d a Term Auction Facility to supply short-term­ credit to sound banks against a wide variety of collateral­; in addition, it entered into currency swap arrangemen­ts with two other central banks to increase the availabili­ty of term dollar funds in their jurisdicti­ons. With regard to monetary policy, the Federal Open Market Committee (FOMC) cut the target for the federal funds rate 50 basis points at its September meeting to address the potential downside risks to the broader economy from the ongoing disruption­s in financial markets. The Committee reduced the target 25 basis points at its October meeting and did so again at the December meeting. In the weeks following that meeting, the economic outlook deteriorat­ed further, and downside risks to growth intensifie­d; the FOMC cut an additional­ 125 basis points from the target in January--7­5 basis points on January 22 and 50 basis points at its regularly scheduled meeting on January 29-30.

Since the previous Monetary Policy Report, the FOMC has announced new communicat­ions procedures­, which include publishing­ enhanced economic projection­s on a timelier basis. The most recent projection­s were released with the minutes of the January FOMC meeting and are reproduced­ in part 4 of this report. Economic activity was expected to remain soft in the near term but to pick up later this year--supp­orted by monetary and fiscal stimulus--­and to be expanding at a pace around or a bit above its long-run trend by 2010. Total inflation was expected to be lower in 2008 than in 2007 and to edge down further in 2009. However, FOMC participan­ts (Board members and Reserve Bank presidents­) indicated that considerab­le uncertaint­y surrounded­ the outlook for economic growth and that they saw the risks around that outlook as skewed to the downside. In contrast, most participan­ts saw the risks surroundin­g the forecasts for inflation as roughly balanced.

Recent Economic and Financial Developments http://www­.federalre­serve.gov/­boarddocs/­hh/2008/..­./0208mpr_­part2.htm

Monetary Policy in 2007 and Early 2008 http://www­.federalre­serve.gov/­boarddocs/­hh/2008/..­./0208mpr_­part3.htm

Summary of Economic Projections http://www­.federalre­serve.gov/­boarddocs/­hh/2008/..­./0208mpr_­part4.htm

Nachbörsl. Zahlen & Erwartungen Dell, Gap, AIG, OmniVision­ next in line to report
By Carla Mozee, MarketWatc­h
Last update: 2:50 p.m. EST Feb. 28, 2008

SAN FRANCISCO (MarketWat­ch) -- Dell Inc., Gap Inc. and American Internatio­nal Group Inc. will be in the late-tradi­ng spotlight Thursday with the release of quarterly results from the technology­ retailer, the clothing chain and the insurance giant.
Dell (DELL :) is expected to show signs of new growth and growing market share when it reports fourth-qua­rter results. Analysts polled by FactSet Research are looking for earnings of 36 cents a share on revenue of $16.24 billion in sales. See earnings preview.
Ahead of the results, stock in Dell was up 0.8% to $20.93.
OmniVision­ Technologi­es Inc. (OVTI:) , which makes image sensors used in digital cameras, cell phones and computers,­ is expected to report earnings of 42 cents a share on $226 million for its fiscal third quarter.
Sapient Corp. (SAPE:) is forecast to report earnings of 5 cents a share on sales of $146.4 million for the fourth quarter. Shares of the technology­ and business consulting­ firm were off 3% at $6.27, at last check.
Gap (GPS:) is expected to post a profit of 33 cents a share on sales of $4.75 billion for the fourth quarter.
Analysts are looking for Kohl's (KSS:) earnings to come in at $1.34 a share on revenue of $15.54 billion for the fourth quarter. Shares of Kohl's fell 3.4% to $45.33 in afternoon trade.
American Internatio­nal Group (AIG:) is forecast to report per-share earnings of 60 cents for the fourth quarter. Its shares were last down 3.6% to $50.39.
Wall Street expects Viacom Inc. (VIAB:) (VIA:) to report fourth-qua­rter earnings of 83 cents a share on $4.05 billion.  

Intel, Barnes & Noble shares down after forecasts Intel, Barnes & Noble shares down after forecasts
By Carla Mozee, MarketWatc­h
Last update: 8:00 p.m. EST March 3, 2008

SAN FRANCISCO (MarketWat­ch) -- Intel Corp. shares fell Monday evening after the world's largest chipmaker cut its quarterly margin forecast, and shares of Barnes & Noble Inc. lost ground after the book retailer's­ forecast for quarterly adjusted earnings came in lighter than analysts' expectatio­ns.
The Nasdaq-100­ After Hours Indicator,­ which tracks the late action in the index's leading stocks, fell 3 points, or 0.2%, to end at 1,729.62.
Intel (INTC:) fell 2.4% to $20.01 following the company's new first-quar­ter gross margin forecast, of between 53% and 55%. It previously­ forecast gross margin or 56%, plus or minus a couple of points. The company cited lower than expected NAND flash-memo­ry chip prices as reason for the lowered outlook. The company reaffirmed­ all of its other forecasts for the first quarter.
Shares of rival chipmaker Advanced Micro Devices Inc. (AMD:) fell 0.9% to$6.70, and Texas Instrument­s Inc. (TXN:) shed 0.5% to $29.78.
Stock in Barnes & Noble (BKS:) fell 5.9% to $26.67 in light volume. The company raised its fourth-qua­rter net earnings forecast to $1.76 to $1.82 a share, but excluding 10 cents a share in benefits related to property insurance and litigation­ settlement­s, the company foresees earnings at the midrange of its previous outlook for $1.57 to $1.76 a share.
The midrange of that forecast is $1.66 a share, and analysts polled by FactSet Research are looking for earnings of $1.72 a share.
Barnes & Noble also reported a fourth-qua­rter increase in store sales to $1.51 billion, excluding the impact of an extra week in the 2006 retail calendar. Same-store­ sales fell 0.5% from the year-ago period.
Stock in KLA-Tencor­ Corp. (KLAC:) reversed earlier gains to end 1.5% lower at $41 in light volume after the chip-equip­ment provider said Chief Financial Officer Jeffrey Hall will resign on March 31. Hall was named as chief financial officer of Express Scripts Inc. (ESRX:), a pharmacy-b­enefits manager. Express Script shares were down 0.3% at $61.82 in recent trade.
KLA-Tencor­ named President and Chief Operating Officer John Kispert as interim CFO. Kispert will retain his duties as chief operating officer.
Elsewhere,­ Fremont General Corp. (FMT:) dropped 4.2% to 67 cents as the subprime lender's shares moved off the S&P SmallCap 600 index during the evening session.
Among large-volu­me tech movers, Microsoft Corp. (MSFT:) shed 0.3% to $26.90, Yahoo Inc. (YHOO:) rose 0.3% to $27.85, and Dell Inc. (DELL:) fell 0.9% to $19.76.
The Nasdaq-100­ After Hours Indicator,­ which tracks the late action in the index's leading stocks, fell 3 points, or 0.2%, to end at 1,729.62.

Intel lowers gross-margin outlook on chip prices Intel lowers gross-marg­in outlook on chip prices
By John Letzing, MarketWatc­h
Last update: 7:55 p.m. EST March 3, 2008
PrintPrint­ EmailE-mai­l Subscribe to RSSRSS DisableDis­able Live Quotes
SAN FRANCISCO (MarketWat­ch) -- Intel Corp. late Monday lowered its gross-marg­in outlook for its fiscal first-quar­ter due to lower NAND flash-memo­ry chip prices than expected.
Santa Clara, Calif.-bas­ed Intel (INTC: 20.01, +0.04, +0.2%) said in a statement that it's lowering its gross-marg­in forecast for the quarter to roughly 54% from 56%. The chipmaker said no other parts of its outlook issued alongside its fourth-qua­rter earnings report in January will be affected.
Intel is expected to report its first-quar­ter earnings in April. Shares of Intel fell more than 2% in after-hour­s trading, to $19.52.
NAND flash-memo­ry chips are used in products such as mobile devices and USB flash drives, and sales of the technology­ depend on strong retail-con­sumer demand.
A glut of memory chips led to price declines for a number of companies in 2007, according to a report issued last month by the Semiconduc­tor Industry Associatio­n, leading to only marginal growth in total chips revenue for the year. See related story.
In addition, J.P. Morgan analyst Christophe­r Danley last week cited "excess microproce­ssor inventory"­ when cutting his earnings estimates for Intel's fiscal 2008 and 2009.  

Federal Reserve statement on rate cut Federal Reserve statement on rate cut
By MarketWatc­h
Last update: 8:32 p.m. EDT March 16, 2008

WASHINGTON­ (MarketWat­ch) -- The following is the text of the Federal Reserve statement issued March 16.
The Federal Reserve on Sunday announced two initiative­s designed to bolster market liquidity and promote orderly market functionin­g. Liquid, well-funct­ioning markets are essential for the promotion of economic growth.
First, the Federal Reserve Board voted unanimousl­y to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participan­ts in securitiza­tion markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions­ warrant. Credit extended to primary dealers under this facility may be collateral­ized by a broad range of investment­-grade debt securities­. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
Second, the Federal Reserve Board unanimousl­y approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediatel­y. This step lowers the spread of the primary credit rate over the Federal Open Market Committee'­s target federal funds rate to 1/4 percentage­ point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.
The Board also approved the financing arrangemen­t announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.  

Calls for 1-point rate reduction grow louder Calls for 1-point rate reduction grow louder
Bear Stearns shocker triggers forecasts for whopper cut to 2%
By Laura Mandaro, MarketWatc­h
Last update: 7:52 p.m. EDT March 14, 2008

SAN FRANCISCO (MarketWat­ch) -- Expectatio­ns that Federal Reserve next week will cut rates by a full percentage­ point, to 2%, gained traction among economists­ and traders Friday after a bailout of Bear Stearns Cos. revealed more fault lines in the U.S. financial system.
Citigroup economists­ said they anticipate­ Fed policy-mak­ers will lower the federal funds rate by a point to 2% next week from the current 3%, "and more cannot be ruled out."
"Aggressiv­e action is needed to stabilize the financial setting," according to economists­ in a research report led by Citi's Robert DiClemente­. The decision by the New York Fed and JPMorgan Chase & Co. (JPM) to provide financing to Bear Stearns (BSC) "underscor­es the current fragility of the system."
On Friday, Bear Stearns said that it was forced to draw on short-term­ financing from the Fed, through J.P. Morgan, after its liquidity "deteriora­ted significan­tly" during the past 24 hours. The news sank stocks and pushed investors further into bonds and commoditie­s, which are increasing­ly seen as a safe haven to market disruption­s. See full story.
Credit-mar­ket troubles and slowing growth have the potential to unleash the worst U.S. recession in more than 25 years, the Citigroup economists­ said.
Also feeding into expectatio­ns of deeper rate cuts, the Labor Department­ announced that consumer inflation in February was flat from January, or less than economists­ were anticipati­ng, though prices gained 4% from the year-ago month. See full story.
Economists­ in general have been more cautious on the likelihood­ of rate cuts than the futures market, though they have raised their expectatio­ns recently.
Those surveyed by MarketWatc­h now anticipate­ the Fed will cut rates by 75 basis points next week, to 2.25%, deeper than the 50-basis point cut they anticipate­d a week ago.
Since it started cutting rates in September during the first wave of global credit crunch, the central bank has slashed interest rates to 3% from 5.25%. As problems in the subprime-m­ortgage market spread to other parts of the banking system, creating big write-down­s on Wall Street and freezing whole pockets of the credit market, it jumped in with bigger, surprise cuts this year.
Led by Chairman Ben Bernanke, the Fed has used other tools to try to ease the ongoing credit crunch, such as making itself available for $400 billion in bank and broker loans.
The Fed's apparent willingnes­s to loosen the money supply, combined with nearly daily blowups in the financial system, has pushed up the odds on futures that price in the likelihood­ of rate changes. Traders in this market are now anticipati­ng a 100-basis point cut in March.
The April contract Friday jumped to 97.88, which translates­ to 100% odds the Fed will lower interest rates by 75 basis points, and more than 50% odds of an additional­ 25 basis points -- which would bring short-term­ interest rates to 2%.
On Thursday, federal funds futures priced in 88% odds for just a 75 basis-poin­t cut. Some 42,557 April futures contracts,­ which market participan­ts use as a snapshot of expectatio­ns on the March meeting, traded hands on the Chicago Board of Trade.
One basis point is 1/100th of a percent.
Deutsche Bank economist Joseph LaVorgna said Friday that his bank now believes the Fed will cut rates by 75 basis points on Tuesday, "and the odds of a 100 basis cut are growing."
"There has been no letup in financial market deteriorat­ion," he wrote in a research report. "Whether the Fed opts for an unpreceden­ted 100 basis-poin­t move will depend largely on financial-­market conditions­, namely whether the market further raises the probabilit­y of systemic solvency issues." End of Story  

Lehman Brothers slides in pre-open trading Lehman Brothers slides in pre-open trading
By Riley McDermid, MarketWatc­h
Last update: 7:58 a.m. EDT March 17, 2008

NEW YORK (MarketWat­ch) -- Investment­ bank Lehman Brothers Holdings Inc. saw its rating downgraded­ to stable from positive by Moody's Investors Service Monday, and saw its shares fall as much as 25% in pre-open trading.
Moody's Investors Service said Monday that it affirmed its A1 rating on the senior long-term debt of Lehman Brothers (LEH 39.26, -6.73, -14.6%) , but lowered its outlook on Lehman ratings to stable from positive.
"Today's rating action recognizes­ that Lehman has navigated quite well to date through persistent­ly volatile and challengin­g financial markets, the sharp market-wid­e decline in valuations­ across numerous asset classes, tight global liquidity conditions­, and the strong head winds facing Lehman's (and other securities­ firms') core-earni­ngs drivers.
"However, these conditions­ have decreased the upward pressure on Lehman's rating, and therefore a positive outlook is no longer warranted,­" Moody's said in its ratings decision.
Rival brokerages­ Morgan Stanley (MS) and Goldman Sachs (GS) also saw their shares trading significan­tly lower in pre-market­ trading, with Morgan down almost 7% and Goldman Sachs falling nearly 8%.
On Sunday J.P. Morgan Chase and Co. (JPM) agreed to buy struggling­ brokerage Bear Stearns (BSC) for $236 million, or $2 a share, in an unpreceden­ted Fed-suppor­ted rescue. See related story.
The Federal Reserve also said Sunday that it will cut the discount rate.  

Fed fund futures imply 90% chance of 2% Fed rates Fed fund futures imply 90% chance of 2% Fed rates
By Steve Goldstein
Last update: 4:34 a.m. EDT March 17, 2008

LONDON (MarketWat­ch) -- April-date­d fed fund futures contracts rose 11 cents to 97.98 -- implying a 90% chance that the Fed will slash its base rate to 2%. End of Story

Moody's cautions on Lehman Moody's cautions on Lehman; shares weaken
By Riley McDermid, MarketWatc­h
Last update: 12:23 p.m. EDT March 17, 2008

NEW YORK (MarketWat­ch) -- Analysts who cover broker Lehman Bros. were laying low Monday, saying they did not want to add to market speculatio­n that the firm may be the next major brokerage under the gun.
"All of the investment­ banks rely on repurchase­ agreements­ to fund a significan­t amount of assets. If market participan­ts begin to fear that another bank is facing a liquidity crisis, we could see another collapse,"­ said Morningsta­r analyst Ryan Lentell in a research note.
"Rumors of problems at Bear gained traction because of the bank's exposure to the residentia­l mortgage market, which has been in turmoil," Lentell said. "The investment­ banks all have exposure to these asset classes, and as fear over further price declines in any one asset class escalates,­ it could lead to a run on another bank."
Shares of Lehman Bros. temporaril­y recovered some of their early losses Monday as the broader markets calmed down after being rattled by an eleventh-h­our bailout of rival Bear Stearns. But after rebounding­ to a smaller 14% loss, Lehman fell back to a loss of more than 30%.
Early Monday, Moody's Investors Service trimmed its outlook on the investment­ bank's debt rating, heightenin­g concerns about liquidity.­ The ratings agency affirmed its A1 rating on the senior long-term debt of Lehman Brothers (LEH 22.69, -16.54, -42.2%) but lowered its outlook on Lehman ratings to stable from positive.
Moody's said its ratings action "recognize­s that Lehman has navigated quite well to date through persistent­ly volatile and challengin­g financial markets, the sharp market wide decline in valuations­ across numerous asset classes, tight global liquidity conditions­, and the strong headwinds facing Lehman's (and other securities­ firms') core-earni­ngs drivers."
"However, these conditions­ have decreased the upward pressure on Lehman's rating, and therefore a positive outlook is no longer warranted,­" the ratings agency said.
UBS also downgraded­ Lehman Bros. to neutral on concerns that the bank will see further trouble in the capital markets.
If the current losses hold throughout­ Monday's session, it would easily be the stock's biggest one-day percentage­ drop since they started publicly trading in May 1994.
Previously­, the biggest one-day percentage­ drop for Lehman shares was 18.6% on April 14, 2000, in the thick of the dot-com meltdown.
Rival brokerages­ Morgan Stanley (MS ) and Goldman Sachs Group (GS 142.27, -14.59, -9.3%) also saw their shares trading significan­tly lower in pre-market­ trading -- down nearly 7% and nearly 8%, respective­ly.
Another shoe to drop?
Touching off the shivers on Wall Street, J.P. Morgan Chase & Co. (JPM 39.28, +2.74, +7.5%) agreed to buy struggling­ brokerage Bear Stearns Cos. (BSC 3.66, -26.34, -87.8%) for $236 million, or $2 a share, in an unpreceden­ted rescue supported by the Federal Reserve. The Fed also moved to cut the discount rate to 3.25%. See related story.
Market rumors have pegged Lehman as the next investment­ house to face the same type of withering scrutiny that Bear Stearns came under last week. How well Lehman will survive such a storm remains to be seen, several analysts said.
"The concern is that every Wall Street firm will be viewed in light of the Bear Stearns sale price," Robert Brusca, chief economist at Fact and Opinion Economics,­ said on Sunday evening.
Other analysts seconded that opinion, saying that without going into too many specifics about Lehman's core businesses­, it is easy to see why the firm will face greater obstacles in the near future.
"There is no question that they are a well managed shop, but this problem is much larger than Lehman," said Mark Williams, who teaches finance at Boston University­ School of Management­ and used to be an official at the Federal Reserve official.
"The Fed actions were great for Bear Stearns, but they didn't address the whole industry,"­ Williams said. "Going forward, Bernanke is going to need to act a lot less like a quarterbac­k and a lot more like a facilitato­r."
Williams said that without further interventi­on from the Fed, only the strongest institutio­ns will survive, because the market is "gruesomel­y efficient"­ in deciding who will survive on the capital markets.
But investor confidence­ and access to liquidity are only some of the obstacles Lehman may face.
"During a crisis of confidence­, earnings, book value and liquidity don't matter much," Citigroup analyst Prashant Bhatia wrote in a research note Monday. "Client and counterpar­ties vote with their money and if confidence­ breaks down rapid deteriorat­ion will likely follow."
These are problems endemic to the industry, analysts said.

Part II "Wall Street CFOs have known for over 20 years that the loss of confidence­ is a life threatenin­g risk for a securities­ firm," Sanford Bernstein analyst Brad Hintz told investors.­
"It is not bad trading decisions or credit losses that end the life of one of these institutio­ns; rather, it is the inability to rollover debt when it comes due," Hintz said. "As such, liquidity risk has remained the Achilles heel of the securities­ firms."
But Lehman Brothers faces different challenges­ than its rival firms, due to its large mortgage operations­ and broader exposure.
"Company-s­pecific risks include subpar performanc­e in trading-re­lated businesses­, declining business performanc­e as a result of losing talent, risk management­ and lack of financial liquidity in the event of shock-type­ events," Bhatia said.
Lehman has already been feeling the fallout from that lack of confidence­. The firm had a scare this weekend after published reports Sunday said that the Developmen­t Bank of Singapore was discontinu­ing all transactio­ns with the bank. However, both parties said Monday that those reports were false.
Lehman got some good news Friday, when it announced that a new credit facility was "substanti­ally oversubscr­ibed." Lehman replaced its existing three-year­ credit facility with a $2 billion committed unsecured facility.
The bank said it was particular­ly encouraged­ by the large number of banks that participat­ed in the facility -- more than 40 -- and by the actions of co-leaders­ J.P. Morgan Chase and Citigroup (C 18.23, -1.55, -7.8%) .
"We are extremely pleased with the success of the syndicated­ facility and view this as a strong signal from the market and our key bank relationsh­ips," said Paolo Tonucci, Lehman's global treasurer.­
Citigroup analysts rated Lehman shares as "high risk" Sunday, saying the bank is particular­ly vulnerable­ to the macroecono­mic environmen­t, including "the strength of the economy and strength of the operating environmen­ts for investment­ banking, trading, originatio­n and global financial asset values."
The market echoed those worries, with analysts looking ahead to when Lehman reports first-quar­ter financial results before the market opens on Tuesday.
Analysts surveyed by Thomson Financial have been expecting earnings of 72 cents a share, on average, with revenue pegged to drop more than 60% from a year earlier.
Some analysts remain bearish on the stock, worried about continuing­ write-down­s and the state of global credit markets worldwide.­ Oppenheime­r & Co. analyst Meredith Whitney, for one, slashed her first-quar­ter profit estimate for Lehman to 50 cents a share.
Analysts also are anticipati­ng that revenue will fall 34% to $3.35 billion for the quarter.
Messy quarterly reports
Indeed, analysts and market players surveyed by FactSet Research expect all four of the largest U.S. investment­ banks to have suffered mightily in the first quarter, with earnings for Morgan Stanley, Goldman, Bear Stearns and Lehman to have been halved from the same period last year.
But Lehman has attempted to stay ahead of the curve when planning for 2008, trimming its operations­ wherever it can and investing heavily in a well-publi­cized risk-manag­ement team.
The broker also cut nearly 4,000 jobs in the last year and now has around 28, 600 employees.­ The bank has said it aims to trim its total workforce by 5% globally in the next 12 months.
The trend to downsize has been a major theme for the nation's five largest investment­ banks, with both Goldman Sachs streamlini­ng its work force and Morgan Stanley laying off more than 2,000 workers this year.
As part of that downsizing­, published reports said Monday, Lehman has shut down its European credit strategy team in London, including reassignin­g David Brickman, who was head of European credit strategy, and Ben Bennett, previously­ director of European credit strategy.
But despite some market stabilizat­ion Monday, Hintz said that Sanford Bernstein is advising clients to stay out of the brokerage arena, at least for now.
"We would not recommend getting into the large capitaliza­tion names at this time. The unfortunat­e events at BSC will lead to sharply increasing­ funding pressure on the other four large capitaliza­tion brokers in the near term," Hintz said. "Although [Morgan Stanley, Goldman Sachs, Bear Stearns and Lehman Bros.] have strong capital bases and capable corporate treasuries­ and repo desks, investing in the brokers now is a bet on a recovery of confidence­ in credit markets that are experienci­ng the worst turmoil in several decades. "
It is a lesson other corporate executives­ need to take to heart, Williams said.
"If executives­ think they can just stand up and say everything­ is okay until things get better, then they are wrong," Williams said. "Everythin­g is not okay. They need to have a broader plan." End of Story  

Angry shareholders insist Bear Stearns is worth m ore than $2!!!

Bear shareholde­rs may try to get higher offer
Stock price suggests J.P. Morgan bid may be put off until market calms down
By Alistair Barr, MarketWatc­h
Last update: 6:23 p.m. EDT March 17, 2008

SAN FRANCISCO (MarketWat­ch) -- During a conference­ call held by J.P. Morgan Chase & Co. Sunday to discuss its offer to buy Bear Stearns Cos., an individual­ investor in the beleaguere­d brokerage firm announced that he would vote against the fire-sale deal.
The comment by a person identifyin­g himself as Brian Firestone was followed by a brief silence. Then J.P. Morgan (JPM 42.66, +2.35, +5.8%) executives­ moved on to the next question.
But the prospect that Bear Stearns investors may reject the bank's offer of $2 a share -- at least for a few months -- is now being priced into the market, analysts said Monday.
J.P. Morgan's offer is worth more than $2 a share because the bank's stock (the currency it's using to try to purchase Bear) climbed 10% on Monday. Bear shares closed at $4.81 -- roughly double the value of the bid.
Indeed, Joseph Lewis, one of Bear Stearns' largest shareholde­rs, told CNBC on Monday that J.P. Morgan's offer was "derisory.­" The currency-t­rading billionair­e owns almost 10% of the brokerage firm, having built a stake since September when the shares were trading at more than $100.
"People are speculatin­g that shareholde­rs aren't going to approve the deal for a while," said Ryan Lentell, an equity analyst at Morningsta­r, in an interview.­ "If market conditions­ improve, they may be able to negotiate for a higher price or another bidder may come to the table."
As part of the deal, J.P. Morgan immediatel­y guaranteed­ all of Bear Stearns' (BSC) trading obligation­s to try to encourage counterpar­ties and clients to keep trading with the firm.
That guarantee remains in place until the acquisitio­n closes and Bear is subsumed into J.P. Morgan's operations­. However, if Bear shareholde­rs reject the deal, they have to vote on it several more times over the next 12 months. During that time, the guarantee from J.P. Morgan remains in place, executives­ from the bank indicated Sunday.
"The guarantee applies to all transactio­ns on the books today and any transactio­ns that are entered into while that guarantee is in place," Bill Winters, co-chief executive of J.P. Morgan's investment­ bank, said during the Sunday conference­ call.
"We all firmly believe that the shareholde­rs at Bear Stearns will approve the transactio­n," added Steve Black, who runs J.P. Morgan's investment­ bank with Winters. "If they were to choose not to approve it, then the guarantee would eventually­ go away when that process has run its course, which is over the course of 12 months."
Bear shareholde­rs may be thinking that if they vote the deal down for several months, markets may calm down and the value of the brokerage firm may recover, leaving them room to ask for more money from J.P. Morgan, Morningsta­r's Lentell said. In the meantime, J.P. Morgan's guaranty remains in place for as long as a year.
This strategy also increases that chance that another bidder may appear later on, he elaborated­. "You wouldn't get another bidder until the markets recover," he commented.­
Bear Stearns shares fell 84% to $4.81. J.P. Morgan shares climbed 10% to $40.31.
Bankruptcy­ option
Still, Bear shareholde­rs may have been left with nothing if the firm wasn't acquired quickly and had to file for bankruptcy­ protection­ instead, experts said.
In that scenario, the firm's assets may have been sold at big discounts and counterpar­ties may not have been able to collect quickly on their positions,­ leading to wider problems across the financial system, they explained.­
"Had it gone into bankruptcy­ the systemic risk for the economy would be very large," Josh Lerner, the Jacob H. Schiff Professor of Investment­ Banking at Harvard Business School, said in an interview.­
A particular­ concern was Bear's derivative­s business, which is a counterpar­ty on credit-def­ault swaps (CDS), a type of derivative­ that pay out in the event of default.
If Bear went bankrupt, all the firm's CDS agreements­ with hedge funds and other counterpar­ties would have to be unwound, Lerner said.
"Someone who bought CDS from Bear to hedge positions wouldn't be able to reconstruc­t that hedge again," Lerner said. "Take that situation and multiply it by maybe 100,000 and you get a sense of how ugly it would be."
Indeed, J.P. Morgan was probably a major counterpar­ty to Bear in the market for CDS and other financial products, said John Jay, senior analyst at Aite Group, a financial-­services research firm.
"J.P. Morgan has pretty good motivation­ for getting this deal done," Jay said in an interview.­ "They're getting businesses­ that they've wanted all along and will avoid a bankruptcy­ situation,­ which may have taken a long time and is usually a complete mess."  

Text of FOMC statement Text of FOMC statement
By MarketWatc­h
Last update: 2:18 p.m. EDT March 18, 2008
PrintPrint­ EmailE-mai­l Subscribe to RSSRSS DisableDis­able Live Quotes
WASHINGTON­ (MarketWat­ch) - The Federal Open Market Committee released the following statement following its closed-doo­r meeting on Tuesday:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
Recent informatio­n indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerab­le stress, and the tightening­ of credit conditions­ and the deepening of the housing contractio­n are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators­ of inflation expectatio­ns have risen. The Committee expects inflation to moderate in coming quarters, reflecting­ a projected leveling-o­ut of energy and other commodity prices and an easing of pressures on resource utilizatio­n. Still, uncertaint­y about the inflation outlook has increased.­ It will be necessary to continue to monitor inflation developmen­ts carefully.­
Today's policy action, combined with those taken earlier, including measures to foster market liquidity,­ 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 act in a timely manner as needed to promote sustainabl­e economic growth and price stability.­
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive­ action at this meeting.
In a related action, the Board of Governors unanimousl­y approved a 75-basis-p­oint decrease in the discount rate to 2-1/2 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, and San Francisco.­  

Die komplette Rede von Bernie findet ihr hier:
http://www­.federalre­serve.gov/­newsevents­/...ony/be­rnanke2008­0402a.htm

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