Federal Reserve officials said Thursday that current economic conditions are good and the financial turmoil hasn't hurt Main Street.
In a luncheon speech to the Atlanta Press Club, Atlanta Federal Reserve President Dennis Lockhart said there are no signs of spillover from the housing and mortgage market woes into other sectors of the economy such as consumer spending.
Lockhart said his comment relied on real-time information from business contacts around the South because much of the new government indicators are "backward looking."
"So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy," Lockhart said.
His remarks echo the sentiment in the Fed's Beige Book report on current economic conditions that found that growth continued across the country at a moderate pace through August with little sign that the credit crunch and financial turmoil have slowed activity. See full story.
But in an earlier statement to reporters following a speech in London, St. Louis Fed President William Poole said the risks of recession have risen as a result of the market turmoil. But Poole said, "I don't think we should take for granted that the economy is going to nosedive."
Later in the afternoon, Dallas Fed President Richard Fisher was upbeat about current conditions.
In answer to a question after a speech in El Paso, Fisher said recent economic data has been "rather positive," and pointed specifically to the August ISM services index, which was unchanged at 55.8%.
Let's make an assumption that Fed governors are in regular contact with one another. In addition, let's also assume they loosely coordinate their public statements. That would make sense at a time like this with everybody looking to the Fed to cut rates later this month. If all of those points are true then a rate cut is not a definite possibility.
So, let's assume the Fed doesn't act. What happens to the market? My guess is a day or two of selling but nothing drastic. After the initial sell-off, my guess is traders would come to the opinion there was no reason for the Fed to cut, meaning things aren't as bad as perceived. I have no idea if that is what will actually happen, but it makes sense. Non-action means the economy is doing fairly well.
Here's how Bloomberg reported the speeches:
Four regional Federal Reserve bank presidents declined to endorse a cut in the benchmark interest rate this month, as policy makers gauge the impact of the credit- market rout on the U.S. economy.
The markets are probably not happy about this development.
