U.K. Retail Sales Unexpectedly Fall Most in 11 Months

U.K. retail sales unexpectedly dropped in December by the most in 11 months as higher borrowing costs and falling house prices curbed consumer spending.

Sales declined 0.4 percent from November, when they rose by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.2 percent increase, the median of 31 estimates in a Bloomberg News survey showed. On the year, sales climbed 2.7 percent, the least since September 2006.

The pound dropped after the report, which showed that an interest-rate cut in December failed to encourage Christmas spending amid the worst housing market slowdown since Britain's last recession in 1992. Kesa Electricals Plc, the owner of Comet electronics stores in Britain, said yesterday that sales growth slowed during the fourth quarter.

``The consumer is feeling the headwinds from the financial and housing sectors,'' Richard McGuire, an economist at Royal Bank of Canada in London, said in a Bloomberg Television interview. ``This will provide added support in favor of a widely expected rate cut in February.''

The pound fell as much as 0.6 percent against the dollar and 0.6 percent against the euro, after the report as investors increased bets on lower rates. The currency traded at $1.9580 and 74.67 pence per euro as of 10:07 a.m. today in London.

The Bank of England reduced its benchmark rate by a quarter point to 5.5 percent in December to help stem the fallout from the U.S. subprime mortgage market collapse, which has pushed up market borrowing costs.

Slowing Growth

A Bloomberg News survey of Jan. 4 showed most economists forecast the rate will fall to 4.75 percent by the end of 2008. The economy grew 0.5 percent in the fourth quarter, the weakest pace in two years, the National Institute of Economic and Social Research estimates.

Sales at non-specialized stores, the category which includes department stores, fell 4.3 percent on the month, the biggest drop since January 2007, the statistics office said. Overall non-food sales dropped 0.9 percent, outweighing a 0.1 percent increase for food retailers.

Jean-Noel Labroue, chief executive officer of Kesa, said yesterday that market conditions were ``difficult, particularly in the U.K.'' Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.8 trillion) of debt.

Lower Spending

Falling property prices may also discourage shoppers. Real- estate professionals said December was the housing market's worst month since the aftermath of the last recession in 1992, the Royal Institution of Chartered Surveyors said on Jan. 16.

Consumers may still pare spending as banks curb loans and the economy starts to slow. ``While only a minority of households may be credit constrained, they are probably sufficient to depress household spending somewhat,'' Bank of England Deputy Governor John Gieve said yesterday.

Jobs growth was still the strongest in a decade in the quarter through November, and unemployment fell to the lowest since 1975 last month. HMV sold 45 percent more video games during the Christmas season as the overall U.K. market expanded 30 percent in unit terms, the company said yesterday.

Retailers also cut prices to attract shoppers. The implied deflator, which shows annual inflation in shops, was 1.2 percent lower than a year earlier, the biggest drop in three months.

Gieve said yesterday that policy makers face ``difficult judgments'' on interest rates as they weigh risks to growth against the threat of inflation, which exceeded the 2 percent target for the past three months.

Dollar Falls to Two-Year Low Versus Yen as Retail Sales Decline

he dollar fell to the lowest level since 2005 against the yen after U.S. retail sales dropped in December, bolstering speculation the economy is headed for recession.

Traders also pushed the dollar to the weakest ever versus the Swiss franc on speculation the Federal Reserve will cut its target interest rate as much as 0.75 percentage point this month to sustain economic growth. The yen rose against all of the 16 most-actively traded currencies on concern that dimming demand from the U.S., Japan's biggest export market, will reduce Japanese investors' appetite for overseas purchases.

``The dollar is in trouble,'' said David Mozina, a senior currency strategist at Lehman Brothers Holdings Inc. in New York. ``The continued implosion of interest-rate support is pressuring the dollar.''

The U.S. currency dropped to 106.84 yen at 4:02 p.m. in New York, from 108.16 yen yesterday, touching the lowest since June 2005. The yen advanced to 158.38 per euro from 160.84, reaching the strongest since September.

The euro fell to $1.4825 from $1.4869 yesterday, after earlier rising to within a cent of its record high of $1.4967 reached in November. Traders' buying of yen versus the euro pulled the euro lower versus the dollar as well, said John McCarthy, a director of currency trading at ING Financial Markets LLC in New York.

The British pound rebounded from a record low versus the euro after U.K. inflation held above the Bank of England's 2 percent target for a third month in December. The Swiss franc reached an all-time high of 1.0856 per dollar.

`Fueling Risk Aversion'

The dollar's decline began earlier as Citigroup Inc. posted a record quarterly loss of $9.83 billion, raising concern that financial companies' losses from home-loan defaults will mount.

Retail sales fell 0.4 percent last month, after increasing a revised 1 percent in November, the Commerce Department said in Washington. The median forecast in a Bloomberg survey was for sales to be flat. Producer prices increased 6.3 percent in December from a year earlier, after a 7.2 percent pace in November, the government said separately.

``The U.S. housing and financial crises are fueling risk aversion in the market and people are covering'' bets against the yen, said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The Japanese economy has difficulties, but the yen is more affected by investment flows'' from Japanese investors.

Fed Versus ECB

The U.S. may already have entered a recession, or will do so shortly, former Fed chairman Alan Greenspan told the Wall Street Journal in an interview published today. He cited purchasing managers' and unemployment data, saying ``the symptoms are clearly there,'' the newspaper reported.

Fed funds futures contracts on the Chicago Board of Trade show a 100 percent likelihood the Fed will cut its target rate for overnight bank loans to at least 3.75 percent this month, from 4.25 percent now. The chance of a cut to 3.5 percent is 38 percent, compared with zero a week ago.

The Fed is next scheduled to announce a decision on rates on Jan. 30. The bank may lower rates before then, though Lehman's base case is for a half-point cut at the meeting, Mozina said.

European Central Bank President Jean-Claude Trichet kept the main refinancing rate at 4 percent on Jan. 10 and said the central bank will ``not tolerate'' an inflation spiral. The Fed's target hasn't been below the euro region's since 2004.

Rate Difference Narrows

At 3.69 percent, the benchmark U.S. 10-year Treasury yields 2.26 percentage points higher than similar-maturity Japanese government bonds, the smallest difference since 1994, according to data compiled by Bloomberg.

``A stronger yen is reflecting the declining expectations of global growth,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The recession risk in the U.S. is higher now. The dollar-yen is the right trade.''

Japan's currency will trade at 107 per dollar by year-end, according to the median estimate of 47 strategists surveyed by Bloomberg. Deutsche Bank AG, the world's biggest currency trader, predicted the yen will advance to 100 by Dec. 31. Lehman Brothers Holdings Inc. is the most bullish, expecting 95 yen.

With either forecast, the yen would eclipse levels that led Japan to sell 14.8 trillion yen ($137 billion) in the first quarter of 2004, the last time it intervened in currency markets to support its export-led economy.

The most volatile exchange rates this decade are prompting traders to buy yen to repay loans in the Japanese currency that were then used to purchase higher-yielding assets. Japan's benchmark is 0.5 percent.

At 10.6 percent, volatility in major currencies is a third higher than its average over the past year, according to JPMorgan Chase & Co.'s G7 Volatility index. The measure reached 13.4 percent in August, the highest since 1999.

The pound rose 0.8 percent to 75.44 pence per euro, from 76.01 pence yesterday and a record low of 76.14 pence earlier.

Crude Oil Futures Fall on Retail Sales Decline, Saudi Comments

Crude oil fell to its lowest in more than three weeks in New York after a U.S. government report showed that retail sales declined unexpectedly last month and the Saudi oil minister said OPEC is ready to increase production.

``We are starting to see a lot of signs that the economy is going to be challenged,'' said Phil Flynn, a commodities trader for Chicago-based Alaron Trading. For oil, ``that means that the demand growth that we have taken for granted may be coming to an end.''

Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today. December's fall capped the weakest year since 2002. Saudi Oil Minister Ali al-Naimi said the Organization of Petroleum Exporting Countries will raise supply if justified.

Crude oil for February delivery fell $2.42, or 2.6 percent, to $91.78 a barrel at 9:39 a.m. on the New York Mercantile Exchange, the lowest since Dec. 21. It rose $1.51, or 1.6 percent, to $94.20 yesterday, the first gain in four days.

Brent crude for February settlement, due to expire tomorrow, was at $91.15 a barrel, down $1.77, on London's ICE Futures Europe exchange.

U.S. Retail Sales Unexpectedly Declined in December

Sales at U.S. retailers unexpectedly fell in December, capping the weakest year since 2002.

Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today in Washington. Purchases excluding automobiles also decreased 0.4 percent.

A sustained slump in consumer spending brought on by falling property values and rising unemployment would mean the end of the six-year expansion, economists say. The report underscores Federal Reserve Chairman Ben S. Bernanke's concern that risks to growth are intensifying.

``Growth stalled out at the end of the fourth quarter and into the new year,'' Joshua Feinman, chief U.S. economist at Deutsche Asset Management in New York, said before the report. ``The economy will narrowly be able to avoid recession.''

Economists forecast retail sales would be unchanged, according to the median of 74 estimates. Projections ranged from a decline of 0.8 percent to a gain of 0.5 percent.

Treasuries rallied and stock index futures fell after the report. Yields on benchmark 10-year notes dropped to 3.73 percent at 8:36 a.m. in New York, from 3.77 percent late yesterday. Futures contracts on the Standard & Poor's 500 stock index expiring in March declined 1.1 percent to 1,404.90.

Producer Prices

Producer prices in the U.S. also dropped in December, against economists' forecasts for an increase. Wholesale prices fell 0.1 percent after a 3.2 percent surge in November that was the biggest in 34 years, a Labor Department report showed.

For all of 2007, retailers posted a 4.2 percent sales increase, the smallest in five years. Purchases rose 5.9 percent in 2006.

Sales excluding automobiles were forecast to decrease 0.1 percent from the prior month, according to the survey median.

The drop in sales was led by a 2.9 percent decline at building-material stores, the biggest since February 2003, reflecting the slump in housing. Sales at clothing, electronics and sporting-goods stores were among those that also decreased.

Purchases at service stations dropped 1.7 percent, which economists said reflected lower gasoline prices. The price of a gallon of regular gasoline in December averaged $3.01, down from $3.07 the previous month, according to AAA, a group representing motorists. Excluding gas, retail sales fell 0.2 percent.

Auto dealers saw a 0.4 percent decline in sales.

Recovery in 2009

AutoNation Inc., the largest publicly traded U.S. car dealer, doesn't expect the nation's auto market to pull out of its slump until 2009, Chief Executive Officer Michael Jackson said from Fort Lauderdale, Florida.

The drop in housing and the slowing economy usually take ``30 to 40 months to work through,'' Jackson said in a Bloomberg Radio interview yesterday. ``So we've had declines in 2006, 2007 and 2008, but I'm feeling pretty good about 2009.''

Excluding autos, gasoline and building materials, the figures the government uses to calculate gross domestic product, sales increased 0.1 percent, following a 0.7 percent gain the month before. The government uses data from other sources to calculate the contribution from the three categories excluded.

Consumer spending, which accounts for more than two-thirds of the economy, is likely to cool rather than collapse in coming months as the housing slump worsens and hiring slows, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Spending Forecast

Spending will grow at an annual rate of 1.6 percent this quarter, down from an estimated 2.6 percent pace in the last three months of 2007, according to the median estimate of economists surveyed by Bloomberg News this month. Spending expanded at an average 3.5 percent pace per quarter over the past decade.

The continued gains, together with increasing exports, will help the economy avoid recession, economists said. Fed rate cuts will ensure a short downturn should one occur, they said.

Bernanke on Jan. 10 pledged ``substantive additional action'' to insure against ``downside risks'' to the economic expansion.

Investors are certain the Fed will lower the benchmark interest rate by at least a half percentage point following two days of meetings of Jan. 29-30.

Discount retailers are benefiting as Americans rein in spending. Wal-Mart Stores Inc., the world's largest retailer, said Jan. 10 that its December sales were within its forecast after it lured shoppers with price cuts on more holiday items.

Five-Year Low

Purchases at chain stores in November-December rose at the slowest pace in five years, according to the International Council of Shopping Centers.

An early Thanksgiving boosted holiday shopping in November at the expense of December sales, economists such as Peter Kretzmer of Bank of America Corp. said. Additionally, gift cards bought over the last two months won't be reflected in the sales figures until they're redeemed in January or later.

The biggest housing recession in 16 years is reverberating across the economy as access to credit tightens, consumer and corporate demand weaken and job growth slows. Unemployment rose to 5 percent in December, a 0.3 point jump from November and a highest in two years, according to Labor Department figures.

The magnitude of the gain from a recent 4.4 percent trough prompted economists including Jan Hatzius of Goldman Sachs Group Inc. to warn that the economy may have already entered a recession.

``Recession has now arrived, or will very shortly,'' Hatzius wrote in a note to clients last week.

Recession pain likely to linger

As recessions go, the most recent downturns have been relatively short and painless. But the recovery was what hurt.

And if the United States truly is in or near a recession, it's quite possible that the lingering pain will be the problem once more.

"I don't know if it (the recovery) will be painful, but I know it won't feel all that great," said Keith Hembre, chief economist for First American Funds.

The risk of recession has become a major focus of economists and Wall Street this week, after Friday's weak jobs report saw unemployment jump to 5 percent and retailers reported the weakest holiday sales in years.

On Thursday, Federal Reserve Chairman Ben Bernanke pledged that the central bank is ready to slash interest rates again to prevent housing and credit problems from plunging the country into a recession. The Fed has cut its key lending rate three times since September, for a total reduction of 1 percentage point.

But a growing number of top economists believe recession is already here, or is at the very least likely.

Most of those using the R word are still projecting relatively narrow declines. They generally see the unemployment rate rising to around 5.5 to 6 percent during the downturn. Some believe that if consumers cut back on spending, it will be only a modest decline.

Many of those economists caution that even if they're right about a mild recession, the pain won't end once the economy starts to grow again.

Paul Kasriel, chief economist at Northern Trust in Chicago, said that even though he sees a short recession, to many Americans, it'll be a long time before they feel like the economy is truly doing well.

Even when growth picks up, that won't be the end of the pain, he said.

"I think the technical recession will be over in 2008, but the trajectory of the recovery in the second half or fourth quarter will be nothing to write home about," he said.

It's typical that unemployment and job losses continue to climb even after the recession formally comes to an end, as businesses respond to the downturn by cutting future spending plans.

In the most recent recession, the eight-month period in 2001, the unemployment rate was under 5 percent for the first six months of the economic slump.

But it climbed to 5.5 percent by November, the last month of the downturn, according to the National Bureau of Economic Research (NBER), the body that puts the official start and stop dates on a recession. Spending by individuals actually grew in five of the eight months of the recession.

The Fed to the rescue

The recession of late 1990 and early 1991 was just as short and nearly as shallow. It saw unemployment climb from 5.5 to 6.8 percent, still relatively modest by historic standards.

But the year and a half that followed the recession seemed just as bad or worse to many Americans, as unemployment rose to 7.8 percent by mid-1992. That allowed Bill Clinton to defeat a sitting president, George H.W. Bush, as his campaign leadership kept reminding themselves "It's the economy, stupid."

Kasriel said the comparison to the 1990-91 recession is a good one, as the economy struggled to recover from the savings and loan crisis that preceded it, just like the 2008 economy will try to adjust to problems in the credit and financial markets sparked by last summer's subprime meltdown.

"Back then, we didn't get much traction from Fed rate cuts until the end of 1993. The reason for that was we had a financial system that was crippled," he said. "I think that's the environment we're going to be in for a couple of years."

First American Funds' Hembre also believes that we could be in for a slow, weak, painful recovery from the current problems.

Recession may already be here

"There are some longer-term rebalancings that need to occur," he said. "We're running at a savings rate of zero today. That is going to have to move higher."

Some recession proponents believe there could be a quick recovery. They cite the fact that the Fed was cutting rates ahead of the recession's start, and that there is talk of a short-term economic stimulus package from Washington, perhaps in the form of tax cuts.

Goldman Sachs' senior U.S. economist Jan Hatzius said he's counting on another 1.75 percentage points of Fed rate cuts and some form of tax relief to keep the recession a relatively mild one.

"If the data are every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said. "But right now the chance we do get some stimulus package is a little more than 50-50."

But there are other economists who believe that the problems facing the U.S. economy are far more serious than being estimated, and that the downturn could be very severe - and very long.

Perhaps the one seeing the worst time ahead is Peter Schiff, president of Euro Pacific Capital, a brokerage firm specializing in overseas investments, who believes not only is the economy already in a recession, but that it risks falling into a depression as severe as the 1930's.

"I think it will last for years," he said. "It's difficult to know if it'll be as bad or worse than the Great Depression."

Schiff said the real estate surge of recent years is the greatest speculative bubble in world history, with Americans borrowing trillions of dollars they can't repay.

"What we're going to go through now is a dramatic reduction in our standard of living," he said.

But Schiff's view is not widely accepted. Most economists, even those who now see an recession in place, are looking for some level of growth in 2008.

The Blue Chip Economic Indicator survey of 52 economists has a consensus estimate of 2.2 percent growth this year, less than what is considered trend growth, but far from a recession. Even Goldman's forecast for the year is GDP growth of 0.8 percent in 2008.

But even if Schiff is wrong and the overall economy rebounds later this year, it doesn't mean that there won't be more problems ahead.

"You're going to have this gradual slowdown in consumer spending ... business capital spending is not likely to be robust," said Northern Trust's Kasriel.

While state and local government spending will slow down as tax collections decline, Kasriel doesn't think any economic sector - other than housing - will collapse.

"But this is going to be sort of lingering death," he said

Gold, Platinum Rise to Record on Declining Dollar; Silver Gains

Gold and platinum rose to records and silver extended its rally to the highest in 27 years as a declining dollar increased demand for precious metals as alternatives to stocks and bonds.

The dollar fell as traders increased bets that the Federal Reserve will lower U.S. interest rates to avoid a recession. Gold has gained 9 percent this year and the dollar has fallen more than 2 percent against the euro, to a seven-week low.

``We're in a falling rate environment. I think that works in gold's favor,'' Richard Urwin, London-based head of asset allocation at BlackRock Investment Management, said in an interview with Bloomberg Television. ``We're probably in an environment in which on average the dollar is going to depreciate. Gold is a good hedge against it.''

The metal for immediate delivery rose $12.31, or 1.4 percent, to $907.71 an ounce at 1:38 p.m. in London. It earlier reached $914.30.

Gold futures for February delivery rose $11.60, or 1.3 percent, to $909.30 an ounce at 8:38 a.m. on the Comex division of the New York Mercantile Exchange. The price earlier reached $915.90, the highest ever for a most-active contract.

Twenty-three of 29 traders, investors and analysts surveyed by Bloomberg from Mumbai to New York on Jan. 10 and Jan. 11 advised buying gold this week. Five said sell, and one was neutral.

``The market is still extremely bullish,'' said James Moore, an analyst at TheBullionDesk.com in London. ``With the U.S. potentially cutting interest rates while those in Europe stay firm, the dollar looks set to add additional upside momentum.''

Gold Bets

Hedge-fund managers and other large speculators increased bets on higher New York gold futures, to a record net 205,404 contracts on the Comex as of Jan. 8, figures from the U.S. Commodity Futures Trading Commission on Jan. 11 showed. Net long positions were up from 199,438 contracts from a week earlier.

Fed funds futures contracts on the Chicago Board of Trade show 100 percent odds the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.75 percent at its Jan. 30 meeting. The odds have risen from 66 percent a week ago.

Demand for gold will be less affected by a global slowdown than silver, platinum and palladium, said Walter de Wet, head of commodity research in Johannesburg at Standard Bank Group Ltd., Africa's largest lender.

Industrial uses for gold, such as dentistry and electronics, made up 15 percent of total demand in 2006 compared with more than 50 percent for platinum and 47 percent for silver, according to estimates by London-based research company GFMS Ltd. Jewelry accounts for almost 60 percent of gold consumption.

ETF Gold

``The investment component of demand for all of these precious metals is dominating,'' De Wet said. ``We're likely to see an increase in all of these metals but gold is probably going to outpace.'' The gains may last until the second half of this year, he said.

Assets in the StreetTracks Gold Trust, the world's biggest exchange-traded fund backed by gold, are up 2.2 percent this year at a record 641.81 metric tons.

Gold also gained as equities declined. The Standard & Poor's 500 Index has fallen for three weeks, losing 4.6 percent, the worst start since 1982, according to Bloomberg data.

``People are looking at precious metals as principally a safe haven while they ride out a correction in equity markets,'' Peter McGuire, managing director at Commodity Warrants Australia Ltd., said by telephone from Sydney today.

The euro traded as high as $1.4915 today. It reached a record $1.4967 on Nov. 23.

Gold has had a correlation of 0.71 against the euro-dollar exchange rate in the past three months, compared with 0.67 in the previous three months. A reading of 1 would mean the two moved in lockstep.

Inflation-Adjusted Gold

Adjusted for inflation, gold is still below its all-time high. The metal is trading at $433.85 an ounce, adjusted for the U.S. urban consumers price index.

Silver for immediate delivery advanced 11.5 cents, or 0.7 percent, to $16.34 an ounce after earlier gaining to $16.60, the highest since November 1980.

Platinum for immediate delivery gained $13, or 0.8 percent, to $1,577.50 an ounce, after earlier touching a record $1,592. The precious metal is used in products such as jewelry and autocatalysts.

Macquarie Group Ltd. raised its forecast for the average platinum price this year by 16 percent to $1,475 an ounce. It also increased its 2009 and 2010 estimates by 15 percent.

Palladium for immediate delivery advanced $2, or 0.5 percent, to $380 an ounce.

Macquarie cut its 2008 palladium forecast by 12 percent to $350 and its 2009 estimate by 14 percent to $365.

The morning platinum ``fixing'' price used by some mining companies to sell their production gained $24 to $1,589 an ounce, the highest ever. The palladium fixing rose $6 to $382, the highest since May 17, 2006.

Following are technical gauges for gold:

20-day moving average 844 100-day moving average 778 200-day moving average 722

14-day relative strength index 77.49

Fibonacci Start End 50% 38.2%

Fed Signals More Aggressive Response to Faltering Expansion

Federal Reserve officials, including Chairman Ben S. Bernanke, are signaling a more aggressive response to the increasing risk of recession.

Bernanke testifies to Congress on Jan. 17, two days after a government report that economists predict will show retail sales stalled last month after a gain of 1.2 percent in November.

The Fed chief and Governor Frederic Mishkin unveiled the new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

``The crucial change in Bernanke's language last week was the reference to the need for insurance,'' Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in a note to clients. Until now, officials ``have tended to describe the Fed's rate cuts as being scaled to the size of the projected problem,'' he said.

Donald Kohn, the Fed's vice chairman, said in Jan. 5 speech that the officials decided to communicate more often with the public after the financial-market ``turmoil'' that began in August.

``We have tried to provide more information than usual to reduce uncertainty and clarify our intentions,'' Kohn said in a speech in New Orleans. The Wall Street Journal reported that Bernanke plans to speak more often and more forcefully.

The remarks by Bernanke, 54, and Mishkin, who have collaborated on academic research, led traders to increase bets the central bank will cut its main interest rate by half a percentage point this month. The Fed has reduced the benchmark rate by 1 percentage point since September.

Disappointing Investors

While the Fed cut the benchmark rate in September by a half-point, more than anticipated, officials have since disappointed some investors by refusing to commit to a series of reductions.

When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

``They underestimated the magnitude of the credit shock,'' said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. ``Now they are catching up.''

Traders now anticipate at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero on Jan. 10, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

`Very Different Direction'

``The Fed is moving in a very different direction,'' said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. ``Risk-management is what they should be doing.''

Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

Plosser said he's ``certainly'' open to more rate cuts, in an interview with PBS's Nightly Business Report on Jan. 11. By contrast, when he spoke Nov. 27, he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

``The thing we are most concerned about right now is consumer spending,'' Plosser said.

Boston Fed President Eric Rosengren said the same day in South Burlington, Vermont, that declining house prices are likely to damp consumer and business confidence.

`Gasoline on the Fire'

``Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire,'' Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. ``The market is betting that the Fed may cut in an inter-meeting move,'' wrote Morris, who Jan. 10 doubled his rate-cut call for this month to a half-point.

Bernanke will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee. He meets with House Speaker Nancy Pelosi today in Washington. Democrats in Congress are calling for fiscal measures to revive growth, while the Bush administration is considering measures of its own.

This week's shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

``We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10. ``The committee must remain exceptionally alert and flexible.''