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By Mike Caggeso
Associate Editor
U.S. Federal Reserve Vice Chairman Donald Kohn – intentionally or not – hinted that another interest rate cut is possible when the central bank's policymaking Federal Open Market Committee (FMOC) meets on Dec. 11.
"The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated," Kohn said at the Council on Foreign Relations in New York, according to a report by Bloomberg News. "We are going to have to take a look at" the stress in credit markets "when we meet in a couple of weeks."
Kohn said policymakers must be "flexible and pragmatic" when deciding what to do about America's growing credit problems, weak dollar and flagging economic outlook.
"We will need to assess the implications of these developments, along with the vast array of incoming information on economic activity and prices, for the future path of the U.S. economy," Kohn said, referring to heightened market stress.
Kohn's comments sparked a surge in stock prices yesterday [for a related report on the biggest two-day surge in U.S. stock prices in five years, please click here]. But even more important, the comments seemed to represent an almost-total U-turn from Fed Chairman Ben Bernanke's stern assurance on Oct. 31 – the day interest rates were cut to 4.5% [the second rate cut this year] – that another rate cut wasn't in the cards.
The vice chairman's comments also were timely, given that a report from the National Association of Realtors said that total existing home sales in declined 1.2% in October, marking the eighth straight month U.S. homes sales have declined. On top of that, the median price of a home dropped to $207,800, a 5.1% plunge from a year ago and the biggest annual decline on record.
Naturally, it isn't the NAR's job to be pessimistic about the real estate market, so NAR economist Lawrence Yun spun the bad news into a verbal massage intended for Kohn and Bernanke's heavy shoulders.
"Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in [Federal Housing Authority] endorsements for home purchases," Yun said. "A trend away from subprime mortgages to FHA loans, which often carry much lower interest rates, is a positive development for consumers and the housing market going forward. Still, it will take some time for the change to yield a measurably higher closed sales volume in the aftermath of the subprime collapse. In the near term, we expect home sales to remain fairly stable."
However, "stable" in the context of the current market conditions means negative, since the housing market has been driving in reverse for eight months.
Layoffs in Related Markets
Companies tied to the housing market are already feeling the pinch.
Bear Stearns Cos. Inc. (BSC) announced yesterday that it will eliminate 650 jobs, its third round of job cuts this year. Earlier this month, the company announced it planned to write down $1.2 billion, giving the company its first quarterly loss and prompting credit-rating agency Standard & Poor's Inc. to lower its long-term credit rating on the company, from A+ to A.
"We're going to rationalize our business, monitor staffing needs and align our infrastructure with current market conditions," Russell Sherman, a spokesman for the New York- based firm, told Bloomberg. "We continue to hire strategically."
Meanwhile, a CNBC report said that Citigroup Inc. (C), the largest U.S. bank by assets, is planning to cut an estimated 17,000 to 45,000 jobs. Money Morning has been documenting Citigroup's woes – including:
- The bank's problems ballooning into $15 billion in write-downs.
- Analyst calls for a dividend cut or asset sale.
- CEO Charles Prince III's abrupt "resignation," making him one of several executives in the banking and financial services sector to be ousted from their jobs.
England-based Wolseley PLC (WOSLF), the world's largest distributor of plumbing and heating products, blamed the lousy housing market for the 1,300 jobs it plans to cut in the United States. In addition, pretax profits for its fiscal first quarter [ended Oct. 30] fell nearly 15%, and U.S. revenue dropped 10% because of weak housing starts, low consumer confidence and declines in the dollar.
"The Board anticipates that business conditions in a number of the Group's markets will become more challenging over the next few months," a company statement said.
And when they say "challenging" in the current market's context, it doesn't mean "stable."
News and Related Story Links:
- Bloomberg News:
Kohn Sees Risk of Reduced Credit From Market Upheaval
- National Association of Realtors:
Mixed Results For October Existing-Home Sales; Mortgages Improving
- Money Morning:
Citigroup's Troubles Continue to Grow
- Money Morning:
O'Neal Finally Out at Merrill Lynch
