The Federal Open Market Committee kept the federal funds rate unchanged at its August 5 meeting, as did the European Central Bank and the Bank of England. The Fed rate remains two percent; the BofE bank rate holds at five percent; and the ECB rate on main refinancing operations stays at 4.25 percent. While the central banks moves seemed to signal stability, in reality they reflected weakening economic conditions in the U.S and abroad.

The Fed statement gives a nod to continued economic growth, but notes that “labor markets have softened further and financial markets remain under considerable stress.” ECB President Jean-Claude Trichet told reporters that inflation is very bad and must be attended to. Then again: “The information on economic activity that has become available since the July press conference suggests that real GDP growth figures for mid-2008 will be considerably weaker than for the first quarter.” Trichet expressed hope that a “relatively resilient world economy” will buy lots of euro zone products. Tell that to Ireland, Spain, Italy, Portugal, and Greece as they stare recessions in the face. The minutes for the BofE decision won’t come until August 13, but the UK economy has recession written all over it.

In the U.S., retail sales look pale, aside from a couple of surprises; mortgages issued last year are souring at twice the rate of 2006 loans; the advanced figures for unemployment claims hit their highest level since March 2002; and overall productivity slowed in the second quarter with manufacturing productivity actually going negative. The Dow Jones slid sharply but jumped even more sharply, with investors viewing a month-long 20 percent decline in oil prices to $116 with relative euphoria rather than as a sign that U.S. consumers are cutting back on gas as their rebate money gets spent—or saved—and as manufacturing sags around the world.

Many eyes were focused on the Fed’s first 84-day, $25-billion Term Auction Facility loan on August 11, hoping that somehow credit will be magically restored. One hopes that liquidity will at least be maintained. The Fed’s July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices puts it in perspective: “Large net fractions of domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months.” And there’s more of the same for the second half of 2008, and not much better expected for the first of half 2009.

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