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Tight credit hurts housing, little else

Beige book report makes chances for rate cut less likely

Representative Barney Frank, Massachusetts Democrat, chaired the House Financial Services Committee hearing on subprime mortgages. Representative Barney Frank, Massachusetts Democrat, chaired the House Financial Services Committee hearing on subprime mortgages. (Jonathan Ernst/Reuters)

WASHINGTON - Financial market turbulence has noticeably hurt US housing activity in recent weeks but has had little effect on other sectors of the economy so far, the Federal Reserve said yesterday.

"Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited," the Fed said in its so-called beige book summary of anecdotal economic conditions.

Although tighter credit worsened problems in housing and was starting to affect commercial real estate, the Fed said loans remained available for most consumers and business borrowers.

Investors interpreted the report, which covers the period July 17 to Aug. 27, as a slight tilt away from a Fed interest rate cut at its next policy meeting on Sept. 18.

Markets have been anticipating a cut in the benchmark federal funds rate since the Fed last month cut the discount rate for emergency bank loans and pledged to take necessary steps to shelter the broader economy from financial market turmoil.

"Essentially, the beige book showed there was no massive deterioration that would spark a rate cut," said Doug Roberts, founder and chief investment strategist, at Channel Capital in Shrewsbury, N.J.

Some analysts held out hope the softening noted in the Fed report gave the central bank some room to cut rates.

"There is enough evidence of cooling here to support a 25 basis point cut on Sept. 18 if the FOMC is so inclined, but market expectations of a handful of rate cuts in quick succession seem extremely aggressive," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

The Fed said tighter credit conditions from financial market turmoil had added uncertainty about how soon residential real estate and construction would recover from the weak sales and prices reported in most districts.

Inventories of unsold homes were generally reported to be high and contacts in seven districts believed softness in the housing market would continue in the near future with the potential for further price declines, the Fed said.

Reports from the 12 Fed districts indicated that economic activity continued to expand in the survey period, but several described growth as moderate, modest, mixed, or slowing.

But employment growth continued at least at a modest pace in every district except Chicago, which characterized conditions as "mixed."

Districts reported little change in overall price pressures, with downward pressure on residential real estate prices. However, higher food costs were widely reported, the Fed said.

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