-- Federal Reserve policy makers' uncertainty over the credit crunch's toll on U.S. growth is making them increasingly unlikely to cut interest rates before their Sept. 18 meeting.
Fed officials are gathering anecdotes from the dozen district banks to assess economic conditions, Fed watchers say. The effort is needed because policy makers expect to learn little from government reports for July, such as durable-goods orders and new home sales, which will reflect conditions before a collapse in securities backed by subprime mortgages prompted a crisis of confidence in global markets.
Stock indexes gained as credit conditions eased, and yields on short-term Treasury bills rose. The four largest American banks each borrowed $500 million from the central bank's discount window Wednesday, a sign that Fed Chairman Ben S. Bernanke's strategy to provide liquidity without easing monetary policy is starting to work.
``They don't want to cut rates if they can avoid it,'' said Joe Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``Things are moving in the right direction. Will it be enough? Maybe.''
By waiting until the September meeting, the Federal Open Market Committee will be able to review a new forecast. All five members of the Board of Governors will be present, along with the district bank presidents, research staff and New York Fed market experts.
Jumbo Mortgages
In the meantime, policy makers are focusing on such scraps of information as the availability of jumbo mortgages -- those exceeding $417,000 -- for borrowers in specific cities.
``You man the phones,'' said J. Alfred Broaddus Jr., former president of the Richmond Fed, who was a policy maker during the 1998 global market rout. ``Anecdotal information is particularly important in these kinds of situations.''
New York Fed President Timothy Geithner, the central bank's chief liaison with Wall Street, holds a daily conference call with the Board of Governors and district bank presidents to brief them on developments. At a video conference on Aug. 16, they decided to reduce the discount rate, the cost of direct loans to banks from the central bank, by half a percentage point to 5.75 percent.
There are still signs of distress and the Fed's patience depends on markets settling down, Fed watchers say.
Investors demanded the highest yields in seven years to buy asset-backed commercial paper after H&R Block Inc., the biggest U.S. tax preparer, said a unit tapped credit lines because it couldn't sell short-term debt. Lehman Brothers Holdings Inc. yesterday shut its subprime lending unit and said it would fire 1,200 employees. HSBC Holdings Plc closed a U.S. mortgage office.
`Anecdotal Information'
``They will use as much anecdotal information as they can get their hands on,'' said former Fed governor Lyle Gramley, senior economic adviser at the Stanford Group in Washington. ``My judgment is that the Fed will cut the funds rate by 25 basis points on Sept. 18, not before that unless markets require it.''
The Standard & Poor's 500 Index gained 0.2 percent to 1,467.10 at 10:08 a.m. in New York. Yields on three-month Treasury bills rose 4 basis points to 3.70 percent. Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp. borrowed $500 million each from the central bank as a show of support for the Fed's discount-rate cut Aug. 17 to 5.75 percent. All four companies have access to cheaper funds.
The Fed will report discount borrowing figures at 4:30 p.m. today in Washington, along with weekly money-supply data.
Fed officials acknowledged the ``downside risks to growth have increased appreciably'' as a result of financial turmoil in their Aug. 17 statement, which updated their Aug. 7 outlook.
Model Shortcomings
The central bank's traditional models can't capture sudden changes in the data, such as a collapse in retail sales or truck purchases, former officials say. District reserve banks would be more likely to pick up this information in their regional survey, known as the Beige Book. When compiling that report, staff ask firms questions about prices, hiring and sales in industries that range from energy to real estate, agriculture and retailing.
``Central banks around the world expected at some point a re-pricing of credit risk,'' said former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisors LLC in Washington. ``The question is the abruptness of the change.''
`Singing Gorillas'
The Dallas Fed calls about 100 businesses in its Beige Book survey. Economists also rely on newspaper articles. Information ranges from the mundane to the quirky. In March 2001, the Dallas Fed reported that retailers ``note good sales of big ticket items, no increase in bad debts and robust Valentine's Day spending, including healthy sales of singing gorillas.''
Bernanke has the ability to change the federal funds rate between meetings in consultation with the FOMC without calling a vote, a tool his predecessor Alan Greenspan exercised in 1998.
The current chairman has stressed that he wants authority to reside in the FOMC, not solely the office of the chairman. That difference in approach suggests a preference for waiting until formal meetings before adjusting interest rates, Fed watchers say.
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