Poole Says Only `Calamity' Would Justify Rate Cut Now (Update2)

By Anthony Massucci and Kathleen Hays
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William Poole, president, Federal Reserve Bank of St. Louis

Aug. 16 (Bloomberg) -- William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a ``calamity'' would justify an interest-rate cut now.

Poole, who confers regularly with regional business contacts and votes on rates at the Fed this year, said in an interview yesterday that ``no one has called up and said the sky is falling.'' The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added.

The comments suggest a reduction at or before the September meeting isn't the certainty that futures traders assume. Reports this week showed increases in retail sales and industrial production in July, while exports surged the prior month. Economists predict that revised government figures will show growth in the second quarter exceeded 4 percent.

``It's premature to say this upset in the market is changing the course of the economy in any fundamental way,'' Poole, 70, said in the interview at the bank's St. Louis headquarters. ``If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don't have the intelligence they need to have a policy actually based on solid evidence.''

His comments were the first by a Fed official since the U.S. central bank joined counterparts in Europe and Asia to inject emergency funds after a surge in money-market rates. The Fed has added $71 billion of reserves in the past five trading days.

Trader Bets

The yield on the September federal funds futures contract on the Chicago Board of Trade was 4.925 percent at 9:45 a.m. in New York, indicating at least a quarter-point reduction in the Fed's target rate. The benchmark two-year Treasury note yields 4.22 percent, the furthest below the central bank's benchmark since 2001, when policy makers were lowering rates.

Goldman Sachs Group Inc. economists said in a report yesterday that ``expectations are rife in financial markets that the Federal Open Market Committee is on the verge of an emergency easing in monetary policy.'' Ed McKelvey, the firm's senior U.S. economist in New York, wrote that the absence of any rate cut suggests Poole's comments reflect ``the balance of opinion within the central bank.''

Housing `Adjustment'

Poole made his remarks after the Standard & Poor's 500 Index dropped for a third day, erasing all of this year's gains. The S&P 500's 6.1 percent retreat since Aug. 8 was the biggest five- day loss since Oct. 9, 2002. The index is down 0.3 percent today, at 1,402.76 today.

Poole acknowledged that the credit-market turmoil will ``stretch out'' the ``adjustment'' in the housing industry. He said he couldn't predict how long the downturn will last.

He also conceded that speculation Countrywide Financial Corp., the biggest U.S. home lender, may go bankrupt shows the mortgage crisis is deeper than previously thought. There is ``a sort of credit crunch'' in place affecting housing and some types of corporate paper, he said.

``The issue to me is whether it spread into business fixed investment or consumption,'' Poole said. ``I don't see evidence that that is taking place.''

The upheaval in credit markets was caused by deepening losses on securities backed by U.S. subprime mortgages. BNP Paribas SA, France's biggest bank, shocked investors Aug. 9 when it halted withdrawals from three funds just a week after its chief executive officer said the lender wasn't at risk.

`Real Economy'

``I don't see any impact as yet on the real economy or on the inflation rate,'' Poole said. ``Obviously, there could be an impact, but we have to rely on some real evidence.''

The argument that expansions would endure the market fallout was echoed by other policy makers around the world.

``I'm convinced these markets' movements should not durably hurt our economies' growth, which is robust,'' French President Nicolas Sarkozy told German Chancellor Angela Merkel in a letter written yesterday and released today.

U.S. Treasury Secretary Henry Paulson said the turmoil will ``extract a penalty'' on U.S. growth rates, though the world's biggest economy is strong enough to avoid a recession, the Wall Street Journal reported, citing an interview.

The FOMC said in its Aug. 7 statement that while risks to growth had increased, inflation remained the predominant concern.

Crisis of Confidence

Three days later, the central bank rushed to contain a crisis of confidence in markets, pledging to inject funds ``as necessary'' to steer the federal funds rate toward the 5.25 percent target.

``There's no way the Fed is going to reduce interest rates before the meeting,'' said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. ``Bill is just being realistic.''

Poole rebutted comments from some Fed watchers that the central bank may be out of touch. The criticism followed comments the St. Louis Fed leader made to reporters on July 31 that the slump in stocks was ``a typical market upset.''

``We're very much in touch with the markets,'' Poole said yesterday. ``We will supply more cash as necessary'' to meet short-term demand for funds, he added.

Poole said he didn't regret that the Aug. 7 statement retained a bias against inflation. He also said that while consumer price gains are ``moving in the right direction,'' the ``job is not done.''

Inflation has slowed for four straight months under the Fed's preferred gauge, which excludes food and energy costs. The core personal consumption expenditures price index rose 1.9 percent in June after a revised 2 percent gain in May, the Commerce Department said July 31.

Poole, who plans to retire next year, is a former economics professor at Brown University in Providence, Rhode Island.

To contact the reporters on this story: Anthony Massucci in St. Louis at amassucc@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net
Last Updated: August 16, 2007 09:52 EDT

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