Shares slip on back of housing data and gloomy Fed minutes

Shares slip on back of housing data and gloomy Fed minutes
By Eoin Callan in Washington andSaskia Scholtes andAnuj,Gangahar in New York
Copyright The Financial Times Limited 2007
Published: August 29 2007 03:00 | Last updated: August 29 2007 03:00


Fresh turbulence hit markets yesterday as the economic outlook for US households became more clouded and fears about the fallout from the crisis in credit markets drove volatility.

Sentiment darkened after it was revealed that Federal Reserve policymakers had acknowledged that deteriorating financial conditions "might require a policy response" even before it moved to staunch a liquidity crisis by lowering the rate at which it lends to banks.

New figures also suggested an acceleration in house price depreciation while consumer confidence this month suffered its biggest fall since the aftermath of Hurricane Katrina two years ago.

The S&P 500 had its worst day for three weeks, falling about 2.3 per cent while investors fled to the safety of government bonds.

Seth Waugh, head of Deutsche Bank's US unit, said markets were undergoing a "dramatic repricing" but that Fed action to increase liquidity would prevent another seizure in credit markets. "We're at the beginning of the end of the crisis."

The Fed minutes showed it had pared back its forecasts on August 7, before credit market turmoil forced it to intervene on August 17. The open market committee's underlying outlook for the economy remained benign - predicting moderate growth and easing inflation pressures. But the minutes suggest policymakers were more concerned about the risks to growth than their statement at the time revealed.

Bruce Kasman, chief economist at JP Morgan, said: "What the minutes show is that there was an even greater shift in the assessment of risk than [publicly] indicated."

The minutes said that "a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response".

A shift in tone in the minutes was accompanied by a reduction in the forecast for growth during the second half of this year and next, in part due to tighter lending conditions and softness in some economic indicators.

Many investors and economists said the liquidity crisis since that meeting meant the Fed was likely to cut rates next month.

"Taken together with developments over the past three weeks - these dovish minutes should be seen as increasing the likelihood that the Fed eases 25bp at the September 18 meeting," Mr Kasman said.

The Fed also underlined its worries about the impact of the US housing downturn. A Standard & Poor's survey released yesterday showed home prices fell 3.2 per cent in the second quarter compared to a year ago.