— Doesn’t See Big Interest Rate Effect on Housing
— Higher Dollar Could Exert Drag on Exports, Manufacturing

By Steven K. Beckner

CHICAGO (MNI) – Federal Reserve officials continued Friday to
monitor the Greek debt crisis and tried to analyze its potential
implications for the U.S. economy and monetary policy amid considerable
uncertainty.

Indeed, the “uncertainty effect” is the biggest problem, one Fed
official told MNI. “We didn’t need another one of those.”

Opinions vary on the likely impact of the crisis.

On Thursday, Chicago Federal Reserve Bank President Charles Evans
expressed concern that the shock wave of risk aversion emanating from
southern Europe could lead to even less bank lending in the United
States, making it even harder to reduce unemployment.

Evans suggested that the crisis could cause the Fed to leave
interest rates low for an even longer “extended period” if it does cause
U.S. financial conditions to deteriorate.

Another FOMC participant, speaking to MNI on condition he not be
identified, was somewhat less concerned about the Greek crisis’s U.S.
repercussions, but stressed that the full impact is unknowable at this
point.

“The direct effects are not that big, but the uncertainty is large
because we don’t know how it’s going to affect sovereign costs in the
rest of Europe,” the official said.

“It’s more of an uncertainty effect,” the source continued. “We
didn’t need another one of those.”

Even apart from the Greek situation, Fed Chairman Ben Bernanke said
Thursday that credit was tight, especially for small businesses and said
the Fed is doing everything it can to increase capital availability.

Asked about the crisis’s impact on lending by American banks, a Fed
official sounded relatively sanguine. “At least in the near term, it
doesn’t seem likely to be a big issue on domestic credit.”

The perceived threat of default by Greece and possibly other
countries has pushed interest rates sharply lower — a seeming boon for
housing finance. But it has also triggered heavy stock market losses,
hurting household wealth, and an upsurge in the value of the dollar,
which tends to make U.S. exports less competitive.

Asked about the net impact of these different forces, a Fed
official did his best to sort out the conflicting factors.

“I think that the recovery seems to be gaining some momentum,” the
official said, “and the momentum is coming not so much from housing. So
the interest-sensitivity of housing is not a big factor in the path of
the recovery.”

On the other hand, if we “get a little bit of drag on exports,” it
could hurt manufacturers, the official continued, adding, “The strength
of manufacturing is at least partly due to the strength of exports, but
not only.”

“So two of the offsetting things you mentioned are not at the
forefront of the economy,” the official said.

** Market News International **

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