Fed says tight credit hurts housing, little else

WASHINGTON, Sept 5 (Reuters) Financial market turbulence has noticeably hurt U.S. housing activity in recent weeks but has had little effect on other sectors of the economy so far, the Federal Reserve said on Wednesday.

''Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited,'' the Fed said in its Beige Book summary of anecdotal economic conditions.

Although tighter credit exacerbated problems in housing and was starting to affect commercial real estate, the Fed said credit quality and availability remained good for most consumers and business borrowers.

Investors interpreted the report, which covers the period July 17 to Aug. 27, as a slight tilt away from a Fed interest rate cut at its next policy meeting on Sept. 18.

Markets have been anticipating a cut in the benchmark federal funds rate since the Fed last month cut the discount rate for emergency bank loans and pledged to take necessary steps to shelter the broader economy from financial market turmoil.

''Essentially, the Beige Book showed there was no massive deterioration that would spark a rate cut,'' said Doug Roberts, founder and chief investment strategist, at Channel Capital Research.com in Shrewsbury, New Jersey.

Stocks, already hurt by earlier data on Wednesday showing weakness in housing and employment, added to their losses after the Fed report, and major indexes ended down around 1 percent.

Treasuries rose on safe-haven buying while the dollar lost ground against the euro and yen .

Some analysts held out hope that the softening noted in the Fed report gave the U.S. central bank some room to cut rates.

''There is enough evidence of cooling here to support a 25 basis point cut on September 18 if the FOMC is so inclined, but market expectations of a handful of rate cuts in quick succession seem extremely aggressive,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

The Fed said tighter credit conditions from financial market turmoil had added uncertainty about how soon residential real estate and construction would recover from the weak sales and prices reported in most districts.

Inventories of unsold homes were generally reported to be high and contacts in seven districts believed softness in the housing market would continue in the near future with the potential for further price declines, the Fed said.

PRICE, WAGE PRESSURES LITTLE CHANGED Reports from the 12 Fed districts indicated that economic activity continued to expand in the survey period, but several described growth as moderate, modest, mixed or slowing.

But employment growth continued at least at a modest pace in every district except Chicago, which characterized conditions as ''mixed.'' ''Though some districts described employment conditions as tight, most reported that wage increases were moderate or steady,'' the Fed said in the report.

Districts reported little change in overall price pressures, with downward pressure on residential real estate prices and back-to-school discounting among non-food retailers.

However, higher food costs were widely reported, the Fed said.

Fed Chairman Ben Bernanke on Friday signaled that policy-makers may give this latest Beige Book extra scrutiny, saying that in light of recent financial market developments, the Fed needs more current data than those economic statistics based on past months or quarters.

''We will pay particularly close attention to the timeliest indicators as well as information gleaned from our business and banking contacts around the country,'' Bernanke told a central bankers conference in Jackson Hole, Wyoming.

The Beige Book, named after the color of its binding folder, is chock full of anecdotal information on hiring, retail sales, construction activity, energy prices and crops in the 12 districts that make up the Federal Reserve system. The latest report was compiled by the Cleveland Fed.

REUTERS PBB RN0306