Economy Slack: Home Loan Bank

NEW YORK -- The Federal Home Loan Bank of New York said the economic recovery apparently began in May, proceeded at a moderate pace for two to three months, then decelerated.

The bank's economic outlook report predicts that the Federal Reserve is likely to become more accommodative soon -- reducing the federal funds rate 25 basis points and the discount rate 50 basis points by yearend. The current Fed funds target is 5.25%; the discount rate is 5%.

Reason to Ease

The Home Loan Bank said the Fed has shown a willingness to respond fairly promptly when it believes it has a "good read" on the economy.

The bank said enough data have accumulated to give the central bank sufficient justification for easing rates.

"The economy seems to be losing some impetus in the two areas that had been leading the recovery -- manufacturing and housing -- but other sectors are not picking up the slack," the Home Loan Bank reported.

Consumers Wary

"Perhaps central to the problem," it said, "is consumer confidence, which remains at levels frequently associated with recession. This is somewhat of a puzzle since consumer confidence has been, in the past, very much higher for long periods during which the unemployment rate also was much higher than at present."

The bank said that, because unemployment spreads across all job categories and income ranges, "consumers appear to be much more concerned about their economic future and, therefore, are more conservative in their spending patterns. Their debt burden only adds to their concerns."

The Home Loan Bank added that economic growth "may be at an even lower rate than had been anticipated at the outset of the recovery."

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