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Possible US recession may depend on state of “commercial paper” securities market: Federal Reserve short of data for 18 September deadline

Posted by gmarkets on 3 September, 2007

US Federal Reserve chairman Benjamin Bernanke will seek to assure the world this weekend that the central bank will keep the US economy afloat during a severe credit crunch, reported The Australian (1/9/2007, p. 37). Recession possible: “The financial market is virtually demanding an interest rate reduction on September 18, when the Fed next meets, and then perhaps two or three after that, to soothe a roiling stock market and prevent a possible recession,” the newspaper said. “‘A nightmare scenario — which no one expects but still creates worry — would involve the failure of a major financial institution with significant holdings of sub-prime mortgage debt’,” The Australian quoted John Silvia, an economist who said interest rate cuts will not have that much immediate impact, as saying.

Economic data scarce in face of critical decision: The Australian wrote: “Diane Swonk, an economist at Mesirow Financial in Chicago, says that the Fed has already made an ‘implicit promise’ to cut interest rates and if it doesn’t, she says, ‘You could then trigger chaos’.” Swonk said the crunch was hurting credit markets, noting that many businesses were having a hard time raising money in the so-called ‘commercial paper’ market in which firms in need of cash issued their own securities to raise money. This was a critical cash-raising market for companies, she said, and if they were not able to use it efficiently to raise money, it could have serious consequences on their own spending plans, affecting the economy and jobs. Swonk said the Fed was keeping a close eye on this market, and undoubtedly would move to ease it. To make matters dicier, Swonk said, Bernanke and the Fed would not have sufficient economic data on which to make a judgment on 18 September.

The Australian, 1/9/2007, p. 37

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