Market turmoil ‘will hit economy’

Market turmoil ‘will hit economy’
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: September 10 2007 18:02 | Last updated: September 11 2007 00:36


The turmoil in financial markets is likely to intensify the US housing downturn and could hit consumer spending, according to Federal Reserve members.

Frederic Mishkin, the Fed governor, said on Monday that tightening lending conditions were weakening housing demand and that “consumer and business spending also could be damped as a consequence of the recent financial turmoil”.

The comments from the voting member of the Fed’s rate-setting committee underline the increased risk that US economic growth will be undermined by a combination of the global credit squeeze and the worst housing downturn in 16 years.

Janet Yellen, San Francisco Federal Reserve Bank president, said house prices seemed to be falling nationally and were “likely to restrain consumer spending”. The threat to economic growth would be “significant” if the housing downturn were accompanied by rising unemployment.

The regional bank president also warned that strong recent US export growth was unlikely to last.

World economic growth and the impact of market turmoil is expected to be the main topic of discussion during a trip by Hank Paulson, the US Treasury secretary, to London and Paris next week. On Monday, Mr Paulson will meet France’s President Nicolas Sarkozy and Christine Lagarde, his finance minister, before travelling to London to meet Gordon Brown, prime minister, and Alistair Darling, chancellor of the exchequer.

The US, European and UK central banks have sought to co-ordinate action in recent weeks to improve liquidity in financial markets.

Mr Mishkin was more upbeat than Ms Yellen on the global outlook, saying “the economies of our major trading partners appear set to continue their expansion. That growth should continue to stimulate demand for US exports of goods and services.”

Edward Lazear, chairman of President George W. Bush’s Council of Economic Advisers, said the US economy was “fundamentally strong” and that the White House did not expect a recession this year or next.

The Federal Open Market Committee is expected to cut interest rates by as much as half a percentage point when it meets on September 18, to stave off risks of a recession.

But in a sign of the differing views among regional Fed presidents, Richard Fisher, head of Dallas reserve bank, warned against an “itchy trigger finger” when it came to rate cuts.

Policymakers agreed that the biggest knock-on effect of tighter lending was being seen in the housing sector.

Mr Mishkin said “economic activity could be affected more severely in other sectors should heightened uncertainty lead to a broader pullback in household and business spending”.