How the Credit Crunch Might Slow the Economy

Could the current credit and markets crisis affect the economy? All eyes were on the Fed as we went to press and what it would do, or not do, with rates on September 18.

Chief U.S. Economist Ian Shepherdson of High Frequency Economics, in Valhalla, New York, said on September 17 that he was looking for a “grudging” 25 bps Fed Funds cut when the Fed’s Open Market Committee met.

Shepherdson, who with High Frequency’s Chief Economist Carl Weinberg publishes Weekly Notes on the U.S. Economy, and Weekly Notes on the Global Economy, adds that the Fed needs to “indicate that it recognizes a softening in the labor market.” He says that for now, “The Fed has no choice but to keep cutting rates.” Bearish on housing, Shepherdson argues that “massive oversupply [is] depressing [real estate] prices,” and “real rates for prime borrowers are 9%,” which he characterizes as “outrageously high.” Moreover, he worries that in terms of working through the real estate crisis, we “may not be halfway there yet,” and that rising unemployment could trigger a “second wave of delinquencies.” The silver lining, he says: lower domestic interest rates.