Silver lining in the storm? Let's hope so ..
Former Fed's Reinhart Says Job Rate May Prompt Bigger Rate Cut By Steve Matthews Jan. 4 (Bloomberg) -- The Federal Reserve may need to lower interest rates by a half-point this month after today's figures showing a jump in U.S. unemployment, said Vincent Reinhart, Fed Chairman Ben S. Bernanke's former top staff adviser. ``This could potentially be a turning point,'' Reinhart, former head of the Fed's monetary affairs division, said in an interview today while attending a conference in New Orleans. ``The U.S. economy is flying closer to the ground than we might have thought before.'' Reinhart's view echoes traders who today increased bets on a half-point reduction in the Fed's benchmark rate at the Jan. 29-30 meeting. The unemployment rate climbed to 5 percent, the highest in two years, indicating a rising threat of recession. ``Today's number, in conjunction with the weakness in equity prices, the continued problems in financial markets, do put on the table 50 basis points,'' said Reinhart, who is now a resident scholar at the American Enterprise Institute in Washington. ``The committee will certainly ease at the upcoming meeting and I wouldn't rule out 50.'' The odds of a half-point move rose to 60 percent today from 34 percent yesterday and zero at the start of the week, according to futures prices quoted on the Chicago Board of Trade. The chance of at least a 25 basis-point cut is 100 percent, according to traders' expectations. A basis point is 0.01 percentage point. Payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, the Labor Department said today in Washington. The jobless rate increased from 4.7 percent, marking the biggest jump in unemployment since October 2001, when the U.S. was last in recession. `Do Want to Worry' ``From a risk management standpoint, you really do want to worry about the possibility of a downturn,'' said Reinhart, who earlier spoke on a panel session with Federal Reserve Vice Chairman Donald Kohn at the American Economic Association's annual meeting. Reinhart, 50, succeeded Kohn in 2001 as the so-called monetary-affairs baron at the Fed. He left the central bank last year. Some economists said the increase in unemployment last month, which was more than forecast, indicates the economy may be close to the start of a recession or already contracting. Before the start of the last recession in March 2001, the unemployment rate rose 0.4 percentage point, according to Labor Department figures. The National Bureau of Economic Research, which determines when recessions begin and end, defines them as a ``significant'' decrease in activity over a sustained period of time. Martin Feldstein, the outgoing head of the NBER, said in a Dec. 14 interview that the chance of a contraction was ``about 50 percent.'' To contact the reporters on this story: Steve Matthews in Atlanta at [EMAIL PROTECTED] . Last Updated: January 4, 2008 15:05 EST
