A light week on the data front was offset by a key speech from Fed Chairman Ben Bernanke. In terms of major indicators, the only notable ones released this week were pending home sales and the trade balance. Pending home sales offered no new insights about the housing market, just more of the same old bad news. The international trade report showed the trade deficit ballooning to its highest point since September 2006—owing entirely to a rising import bill for crude oil.

 

Federal Reserve Chairman Ben Bernanke offered up his thoughts on the state of the economy in his speech and perhaps opened the door to larger cuts in the federal funds rate. Mr. Bernanke even offered up a mea culpa of sorts, suggesting the Fed is now more in line with financial market expectations that lower rates will be necessary to keep the economy out of recession—even if it means those rate reductions might fuel inflation. The chairman stressed that the FOMC is not “currently forecasting a recession”, but rather sees slower growth in the months ahead.

 

However, the word “recession” seems to be gaining traction among economists. According to the Wall Street Journal’s monthly economic forecasting survey (subscription required), the chances of a recession within the next 12 months are now pegged at 42 percent, up from a meager 23 percent back in July 2007. Also, economists don’t see energy prices prompting a recession despite the recent run-up in crude oil prices past $100 per barrel. The average estimate put prices rising to roughly $120 per barrel before exerting enough drag to tip the economy into recession, and prices would have to stay there for a prolonged period of time before this scenario would likely play out.


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