No No No, not nuts. They mentioned the credit contraction to the minimum extent possible. Notice not a word about the fact that it's going to crush housing...just, "the housing correction continues."

YOU BET IT DOES BEN. He really must be crappin some bricks right now.

That has to be one of the sharpest market inflection points I have seen yet. The Fed rate announcement and bang! It will be interesting to see if it continues downwards and if it does so quick or slow.

By keeping rates steady despite the turmoil in the mortgage markets, the Fed is saying that excess liquidity is still the primary threat (see yesterday's stock market for an example).

The Fed remians in "Punch Bowl Removal" mode.

This is the correct course of action, though I would have preferred a 150bps rate hike. But you can't have everything you want.

Hey! Some clown named mehl said we were closing at 14,000 today so i dumped all of my money into an index fund. What happened?

Just kidding, of course.

the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected... (emphasis added)

BTW during the NASDAQ bubble, people who knew Greenspan personally claim that he manufactured the inflation excuse to justify raising rates when his real intention was to pop the bubble (which the Fed has no authority to do and may actually violate their mandate to keep employment high).

I suspect something similar is happening here.

RIP

I do think the possibility (reality) of home prices falling screws up every risk model currently being used in the MBS market, so the market is in chaos.
However, at some point people are going to remember that a mortgage to a prime borrower with a significant down payment is the lowest risk investment this side of gov't bonds. The market will start to unstick itself soon and return to the right level. The “old-school” 20% down jumbo loan will be back near 6% by fall with or without the fed getting involved.

dis, take a look at the numbers. We CLEARLY have a slowdown. We dont yet have an official recession, but remember, they are always backdated.

I don't have a strong opinion on Bernanke yet. But the guy has been
left with an incredible mess to clean up, and I think history will at least recognize that the mess was not of his making.

I agree. I am beginning to see more and more references to "Greenspan's Mistakes" in the news than I ever have before. If this continues, and Ben keeps holding the line, Bernanke will be looked at as the responsible parent who had to clean up after the house party his kid threw.

My Take cross posted from Zacks.com

The Fed meeting just ended with no change in the Fed funds rate. Below is the current statement, interspersed with the previous statement and my commentary. As expected, they left the fed funds rate unchanged. They modified the language only slightly and actually maintained a tightening bias. I suspect the market will find the tone of the statement very disappointing.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. (Today)

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. (June)

Sort of self explanatory, the Fed has been on hold since last Summer after a string of consecutive increases that brought rates up from 1.00% to 5.25%

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. (Today)

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters. (June)

The Fed threw the markets a bone with a bit more of an acknowledgment that there is a problem with credit availability. Not to have had some mention of that would have shown the Fed totally divorced from reality. They put a little more meat on the bones as to why they expect the U.S. economy to grow. The answer lies abroad. Once the U.S. was the locomotive of world economic growth, today we are one of the box cars being dragged along by others. No sense of urgency in the communication. They try to minimize it as tighter conditions for some households and businesses, as if they are just isolated instances.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures. (Today)

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures. (June)

Didn’t change a thing, not even a comma.

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information. (Today)

I

G.19 Released
Consumer credit increased at an annual rate of 5-1/2 percent in the second quarter of 2007. In June, consumer credit increased at an
annual rate of 6-1/2 percent.

Revolving credit increased 8.4 percent.

There might be something to Ben's plan.. The Economist just posted an article stating that now might not be such a bad time for a credit squeeze, if done right, just to push through a healthy repricing of risk.

Premium content | Economist.com 

Market turmoil
A good time for a squeeze

Aug 2nd 2007
From The Economist print edition
Tighter credit conditions are just what the markets need

BANKERS and investors might not agree, but the recent sell-off in financial markets is good news. It may, at last, have brought people to their senses. For the past few years, too much money has been lent too cheaply and too easily to too many people, whether it was speculators trying to make a fast buck in Miami condominiums or private-equity groups financing their latest multi-billion-dollar takeover. This wake-up call came too late to save the American housing market from frenzy and subsequent bust. But it may have arrived in time to stop the takeover boom getting out of control—and when the world economy is strong enough to cope with the consequences.
Watch out for the American consumer

The big question now is how serious those consequences are likely to be. The impact on debt markets themselves will be big (see article). As standards are tightened, many of the reckless practices that have become the norm in corporate lending will be abandoned. We will now hear a lot less about firms getting “covenant lite” loans, under which lenders give up their rights to monitor the behaviour of borrowers; or “payment-in-kind notes”, which allow borrowers to substitute more IOUs for interest payments. As investors steer clear of riskier debt, the takeover bids that have pumped this year's stockmarket froth will be curtailed and the most debt-laden borrowers may find it impossible to raise funds.

But most companies will be able to shrug off the credit squeeze. That is partly because creditworthy borrowers still have access to debt (albeit at a higher price), and partly because many firms don't have to borrow. Across the rich world, firms are flush with cash. Their profits have been fat for the past five years and, on average, companies have been funding their capital spending from their own resources. Credit wobbles by themselves, therefore, need not prompt an investment slump.

...

Yet although banks are the biggest worry, their balance sheets look fairly solid. America's commercial banks bought back $58 billion-worth of their shares in the year to March, suggesting they have capital to spare. And although banks' shares have tumbled over the past few weeks, analysts are still forecasting higher profits for the year ahead. If the solidity of bank finances is to be tested, the markets have chosen a good time to do so.

Credit cycles are unpredictable creatures. Things could still go badly wrong. So far, though, the financial wobbles, however unnerving, look like a healthy repricing of risk. Markets, much lik

Continued:

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. (June)

Just a little bit of a nod to what has happened in the credit market, but doing everything in their power to minimize the situation without looking like they are from a different planet. The key words are that they see the predominant risk is that inflation will not continue down. Thus they still have a tightening bias. While I had expected no change in the Fed Funds rate, I had expected much more in terms of a change in the policy language. I find the statement to be disappointing and I’m sure the market will to. Basically its saying we are not going to do anything to address the housing/mortgage situation until there is a real chance that one of the “too big to fail” banks (like C, JPM, BAC) is in trouble. As far as the credit market is concerned, the cavalry is not about to come over the hill, not that we expected to show up. However, with this statement, the Fed is saying they are not even saddling up their horses, although they are willing to listen to further reports.

The market, driven by the hedge funds and or PPT or who ever is able to boorow as much YEN as they want is acting as if there was a rate cut.

They still want to take out the shorts who correctly bet that there would be no cut so they keep driving financials and HB up....

If there had been a rate cut, this market would be up 2%.

Banker, if there had been rate cut the dollar would have been down 2% by now.

Probably both of you would be right. This stupid market is whipsawing back and forth on the news that there is no change. Can you imagine the impact of an actual rate change? All I hope is that my company's traders were long on volatility.

Banker, it's on the way to a 2% increase on no change.

This is insanity.

its one massive short squeeze. short into it and you will be rewarded sooner than later.

bad news at inflection pts in the economy is expected to cause increased volatility. if you can't stomach it, get out.

This kind of volatility reflects the uncertainty and stress building in the financial system. I would say the countdown to a fat-tail dislocation event has begun.

professional traders love this kind of volatility. rape you on the way up and the way down. just do the same thing and try to stay one step ahead of them.

"America needs to make stuff, export and save. period"

Save! what is wrong with you man. These days if you are a saver people consider you strange and weired.

Banker,
Is it safe to say the market is frozen because no one is able to assess the risk?

At least with a box of chocolate, you know you'll get some chocolate.

DustDevil,I watched this stuff going up here in sonoma county,and your comments on the construction quality understate the problems.Much of these homes will be uninhabitable in a few years because it is full of mold or quite literally falling apart,and this is NOT an isolated problem.I told one potential buyer two years ago to get a 15 year loan because the home he was considering buying would not be standing in 30 years no matter how much work he put into it...I got the usual thanks.

The people in NYC have NO IDEA how bad it is to live in a crappy stucco commune where the entry price was 6 to 7 times annual salary.

They have NO IDEA what it's like out there! They are a SHAME, they are SHAMEFUL! My people have been in this business for 25 years and they are LOSING THEIR JOBS! BOOYAH!

They don't do rate cuts on 10 yr Treasuries. They cut the overnight bank lending rate.

This distinction makes virtually no difference at all if the lenders do not believe they are going to be paid back.

David Pearson Is there a precedent for having this level of consumer credit growth coincident with such anemic consumer spending growth?

Actually consumer credit in the short term isn't growing that much. The growth has definitely slowed.

If you look at consumer credit on a quarter to quarter basis (try the total numbers which are non-SA), you see a relatively conforming trend with a slight rise this year. Fourth quarter high, payoff in first quarter, second quarter starts to rise.

What was different this year is that the payoff has been slower, undoubtedly due to the inflation crunch on disposable income. Overall, consumer credit looks like a moderate to slow Christmas and continued tight spending up until then to finance it. In tight years many families really start constricting their spending on the weekly stuff in the summer to finance Christmas.

Publix' move to offer free antibiotics is a reflection of how tough the situation is for grocery stores.

I generally use the real income figures from the productivity releases for modelling the lower 2/3rds of income earners and today's release showed a decline in the second quarter.

Quarterly percent change real hourly compensation was
-0.7 for business and -2.0 for nonfarm business.

Annual percent change was
2.6 for business and 2.4 for nonfarm business.

Granted, the high level of expected resets on mortgages this year is likely to have some effect, but to me that falls in the category of wait-and-see. In some areas borrowers who are deeply underwater are just not paying and waiting to be foreclosed on, enjoying the free rent. For all I know it could be a net stimulus in the short term in a few places like Sacramento.

Consumer credit will be revised of course, but the current numbers are:
Revolving:
2005 Q4: 849.8
2006 Q2: 840.9

2006 Q4: 903.4
2007 Q2: 899.0

Non-revolving:
2005 Q4: 1476.2
2006 Q2: 1484.4

2006 Q4: 1527.4
2007 Q2: 1543.3

Total:
2005 Q4: 2326.0
2006 Q2: 2325.3

2006 Q4: 2430.8
2007 Q2: 2442.3 (note increase)

Also the Compucredit numbers for the last three quarters show a real balancing act going on. Capital One supposedly raised rates across the board, and I wonder if they will see a rise in defaults.