Mishkin??™s Remarks Suggest December Cut Has Low Likelihood

Governor Mishkin??™s remarks this morning stressed that a December rate cut has a low likelihood. In his opinion, the October 31 move was an ???insurance??? to address ???macroeconomic risk??? such as a situation when a financial market crisis may cause a significant deterioration in the real economy. He qualified his remarks saying that ???in the quest to reduce macroeconomic risk, policy makers overshoot and ease policy too much, they need to be willing to expeditiously remove at least part of that ease before inflationary pressures become a threat.??? Furthermore, he noted that the October ease could have been postponed but the ???costs of inaction outweighed the benefits, especially because, should the easing eventually appear to have been unnecessary, it could be removed.??? He concluded his speech saying that a watch-and-wait mode is appropriate for now. Governor Mishkin is awaiting additional data and market developments to assess the type of monetary policy that will be suitable, similar to the implications of the policy statement of October 31.

Senior Loan Officers Survey ??“ Underwriting Standards Tighten Further

The FOMC has lowered the federal funds rate and the discount rate as of October 31 following a cut in September and a discount rate reduction in August. These actions had the explicit purpose of easing financial conditions, reducing market stress and forestalling the adverse effects of the financial market debacle on the broader economy. The Senior Loan Officers Survey results (Charts 1-3) show that banks have tightened standards (Chart 1) for loans to small and large firms and consumers; underwriting standards were tightened for non-traditional and prime mortgage products.

The survey reports about standards for mortgage lending under the three categories shown in Chart 3 only from the second quarter of 2007. The history of responses pertaining to mortgage underwriting shows that underwriting standards are more stringent now compared with the entire history (see Chart 4) of this survey. The bottom line is that the Fed will have to cut the federal funds rate more to ease pressures in financial and credit markets.

ISM Non-Manufacturing Survey ??“ Mixed Picture

The business activity index of the ISM non-manufacturing survey for October posted an increase to 55.8 from 54.8 in September. The new orders index advanced in October (55.7 vs. 53.4 in September) but indexes tracking employment (51.8 vs. 52.7 in September) and prices (65.3 vs. 66.1 in September) declined. The new orders index has risen in only four out of the first ten months of the year. The survey presents a mixed performance of the service sector. Comments from respondents indicated that ???retail trade is very sluggish.??? In the wholesale sector, sales were reported as below budget. Financial services business was reported to be affected by the credit market crisis. The tone of these comments is inconsistent with the increase in the business activity index.