'The economic situation has become distinctly less favorable since the summer,' Bernanke told lawmakers a few days back. He added that the Fed will act in a timely manner as needed to support growth and to provide adequate resources against downside risks. This was taken as an indication that Bernanke would cut rates again if needed.Yesterday President Bush admitted that the economy is not doing well,but he insisted that the US is not in recession. This week various influential people from the financial world, including Warren Buffet, have argued that the US is already in recession.
Bad news continues to pour in from all sides. The economy unexpectedly lost 63,ooo jobs in February, the biggest drop since March 2003. If one accounts for the 38,000 new jobs created in the government sector, then the private sector lost 101,000 jobs in February.These figures point to an impending recession. Little wonder then that Bush felt compelled to speak about it.US Treasuries have risen pushing down yields on growing speculation that the Fed will lower interest rates by 0.75% at its March 18th meeting. Fed funds futures contracts on the Chicago Board of Trade show that the odds of the Fed lowering interest rates to 2.25% at its March 18th meeting have increased to 74 percent.
Rising unemployment and increasing credit market losses have led many to believe that the Fed may go ahead and cut interest rates by as much as 100 basis points. Interest rate futures on CBOT indicate a 32 percent chance of this possibility.
Since increases in commodity prices have made it almost impossible for central bankers to predict how much inflation will be rising, the Fed is no longer talking of controlling inflation.The core inflation rate excluding food and fuel prices is still at comfortable levels.The task on hand is to avoid recession at any cost. Inflation can be handled later. People are losing their sense of economic security.The markets cannot be allowed to run their course.The government has to step in and defend the markets.If the stock markets decline further, mutual funds and pension funds will start taking a hit, with disastrous consequences.The Fed must, and will most certainly intervene aggressively by its next policy meeting.