A second round of pain on the fallout from rising mortgage interest rates means the Federal Reserve could still cut benchmark rates later this year, an interest rate strategist with BNP Paribas said on June 12.
"We think, effectively, over the next three to six months the Fed will have a window to lower rates if they need to," BNP's Richard Gilhooly said at the Reuters Investment Summit in New York.
Fed rhetoric has been laying the groundwork for a possible shift, even while financial markets have spent the past month or more taking out all the implied easing for 2007, Gilhooly said.
"The Fed is indicating that that housing market will continue to be a problem," he said. "It's clear the (Federal Open Market Committee) statements have become more balanced."
Gilhooly said the impact on consumers as adjustable-rate mortgage reset at higher interest rates, following on the heels of the crisis in the subprime mortgage market, "has not happened yet. But later this year the Fed will, if anything, have a little room to cut rates."
Many three-year ARMS from 2004 will reset to the 6-1/2 to 6-3/4 percent area from the 4 percent range, he said.
Gilhooly said the case for a Fed ease would be bolstered if the core personal consumption expenditures (PCE) index dropped toward a year-over-year 1.8 percent in the next three months from April's 2.0 percent.
A number of Fed officials have cited 1 percent to 2 percent on the core PCE as their "comfort zone" on inflation, although the bank does not use an official target.
Looking further ahead, Gilhooly said the 2008 outlook could be biased more toward rate increases driven by higher global inflation and rising commodities prices.