WASHINGTON (AP) — Consumer inflation rose at the fastest pace in four months in September, reflecting higher energy and food costs.
The Labor Department reported Wednesday that its closely watched Consumer Price Index increased by 0.3 percent last month as energy costs, which had been falling for three months, posted an increase and food prices jumped by the largest amount since June.
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");So far this year, consumer inflation is rising at an annual rate of 3.6 percent. That compares with an increase of 2.5 percent for all of 2006.
The 0.3 percent CPI increase was slightly above the 0.2 percent advance that economists had been expecting. Core inflation, which excludes energy and food, was up a more moderate 0.2 percent, in line with expectations.
The 0.3 percent increase in consumer prices in September was the largest rise since a 0.7 percent surge last May, when energy prices were soaring.
Energy costs were up 0.3 percent in September following three straight monthly declines. Gasoline costs rose 0.4 percent, the biggest increase since May, while heating oil costs were up 0.9 percent.
Food costs jumped 0.5 percent last month, the largest increase since a similar rise in June. The higher prices were led by a 13.1 percent surge in the cost of dairy products and a 7.2 percent increase in poultry prices. The cost of fresh fruits, beef and pork were also up. Vegetable prices, however, fell by 4 percent in September.
All the latest news on the economyThe 0.2 percent increase in core inflation, which excludes energy and food, matched the gains of the past three months.

Airline ticket prices rose 1.1 percent in August, while clothing costs were up 0.3 percent. However, new car prices fell 0.3 percent.

NEW YORK (Fortune) — Careful optimism about the U.S. economy and financial system has given way to a resurgence of unease in the last couple of days, prompted by an announcement Monday of an extraordinary plan to pump liquidity into an important part of the debt markets and less-than-upbeat speeches from Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Suddenly, the credit crunch is being talked about as a serious phenomenon again. But, as is always the case on Wall Street, it won’t be long before a gaggle of self-interested players make their way to center stage to tell us that recovery is just around the corner, seizing on any halfway optimistic shred of data to bolster their case.
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FORTUNE 500Current IssueSubscribe to Fortune cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");So, in an effort to stay grounded amid the hype, it’s worth making a shortlist of things that need to start happening before anyone can talk about the credit crunch coming to an end.
First: way more transparency. The movers and shakers need to tell us what’s really happening and show that they understand the seriousness of the credit crunch.
Take the mess created by the so-called structured investment vehicles (SIVs), which Citigroup (Charts, Fortune 500), Bank of America (Charts, Fortune 500) and J.P. Morgan Chase (Charts, Fortune 500), under the sponsorship of the Treasury, are trying to shore up, according to a plan announced Monday. Citigroup has $83 billion of SIVs, which reside off its balance sheet. The Treasury-sponsored move is a clear sign the SIVs have problems, but Citigroup has not said why it can’t solve its SIV problems on its own (not strong enough?) and it hasn’t even begun to provide key data points, like losses racked up in its SIVs so far, the potential demands on Citi’s balance sheet if the SIVs do have to come onto its balance sheet and amount of SIV debt it’s actually been able to sell to replace debt that’s coming due.
Recession chatter gets louderIn short, the SIVs, because of their size - they hold about $400 billion of assets - are a massive cog in the credit machine, and the public knows nothing meaningful about them.
Second: greater realism. To be fair, this week, Bernanke and Paulson have started to acknowledge that the credit crunch is far from over.
Paulson, in a speech Tuesday, acknowledged something that half of Wall Street still won’t recognize - that the mortgage mess is spreading beyond the subprime sector.
"Yet, the problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing," Paulson said. And in a speech Monday night, Bernanke softly echoed this, saying, "…despite a few encouraging signs, conditions in mortgage markets remain difficult."
But something big that happened last week shows that the depth of the credit problems have not been fully recognized. The credit rating agency Moody’s downgraded a massive number of mortgage-backed securities that hold subprime loans, and held up the possibility that there will many more downgrades to come.
When a much fewer number of bonds were downgraded in the summer (approximately 700 then versus 2,200 last week), there was a sharp negative reaction, but this time the market reacted with a shrug of the shoulders.
"This was a huge event that went almost unnoticed," says Joseph Mason, professor of finance at Drexel University. That makes no sense, says Mason, because this will have a huge negative impact on collateralized debt obligations, those weird and toxic debt securities that have already caused big hits to banks’ balance sheets, and will only cause more after the downgrades.
Third, there has to be a complete discrediting of the view that says asset prices are not that out of line and it’s only a matter of time before liquidity comes back to the market. The opposing view - that, in fact, liquidity can’t return in earnest till bond prices fall to levels that look enticing - has to become the new orthodoxy, all the way up to the Fed.
Bernanke seems to be a committed proponent of the former view. In explaining the Fed’s recent actions Monday, he said a central bank has to do things that will prevent sales of assets that "will drive the prices of those assets well below their longer-term fundamental values, raising the risk of widespread insolvency and intensifying the crisis."
But what if their fundamental values are actually much lower than the central bank thinks? Then the Fed would be delaying the inevitable, by doing things that keep assets at prices that are too high. Sure, drops in bond prices could cause even more markdowns than have taken place at the banks, but if they’re going to occur anyway, it makes no sense to delay them. We need the banking sector as a whole to return to normal more than we need certain banks to survive or remain independent, which brings us to our fourth point.
The pace of consolidation in the financial industry has to pick up markedly. This will allow the stronger banks to swallow up weaker lenders, which would lead to a far more efficient use of the balance sheets.
If, say, China Citic Bank were to acquire a minority stake in Bear Stearns (Charts, Fortune 500), it’d be a great start to this process, but there’d have to be much larger deals. But, again, prices have to fall - in this case, the stock prices of the banks themselves.
Potential deals can already be seen. Bank of America no doubt would love to increase its effective stake in troubled mortgage lender Countrywide (Charts, Fortune 500), but probably at a stock price below the current $18.09.
And one event that could surely galvanize the financial markets is if Citigroup’s stock, as a result of its SIV mess, fell to a point where an acquisition became interesting to rivals. Wounded banks are a huge drag on the economy - look at Japan in the ’90s - so it always pays to have them quickly acquired.
And, finally, the credit crunch is not only a financial industry problem. It has occurred because borrowers took on way too much debt themselves. Sadly, it will take years to mend this. One statistic shows this more clearly than any other: Household liabilities as a percentage of the market value of total assets, which includes everything from houses to cars to stocks. At 19%, it’s now at its highest level than at any time in the past 50 years.
It could take years to bring that ratio down. But one thing credit crunches are good at is forcing debt levels down so they become more manageable, preparing the ground for a recovery.

For individuals and the banks it’s the same: For the credit crunch to end, we have to let it actually happen.

(Fortune Magazine) — "No one knows what anything is worth." Lately I’ve heard that from lots of people. We’re in one of those odd periods when things feel unmoored.
Six months ago you knew, or at least you thought you knew, what your house would sell for. Now you probably don’t. The bond market is quaking with fear about the credit crisis, while the stock market is saying rock on.
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FORTUNE 500Current IssueSubscribe to Fortune cnnad_createAd("401110","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=technology&cnn_money_section=quigo&pa rams.styles=fs","200","220");"Either U.S. economic conditions are really not that bad after all, or investors are suffering from a collective attack of wishful thinking," Martin Barnes, editor of the Bank Credit Analyst, wrote recently.
The hidden risks in bondsValuation is supposed to be a science, sort of, but there are times when it feels more like a demented form of multivariable calculus. Bond guru Bill Gross of Pimco recently wrote that "the modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."
But while you may not be able to analyze the price of a security right now, you can at least analyze the insecurity.
The first issue is that the nationwide decline in home prices that wasn’t supposed to happen — even Alan Greenspan said he didn’t expect it — and there’s no historical precedent for it. Pros like Steven Romick, who heads the FPA Crescent Fund, look to the past for lessons.
After 9/11, for instance, Romick studied how Israel’s economy coped with the threat of terrorism. But he says home prices haven’t fallen nationwide (in nominal terms) since the 1930s.
Another issue is that our homes are assets with two dangerous traits: They are laden with emotion, and they are illiquid. While you could sell a share of IBM (Charts, Fortune 500) today, you probably couldn’t sell the roof over your head in a day, or maybe even a year.
The inventory of unsold and new homes is still extremely high, which suggests that a "clearing price" — a price that buyers and sellers agree upon — has yet to be found. It’s hard to feel secure when your feet can’t touch the bottom.
But the scariest thing is that today the price of every asset — houses, stocks, and bonds — seems to rest on a foundation that looks increasingly shaky. David Wyss, the chief economist at S&P, puts the losses from the subprime meltdown at around $150 billion, a manageable figure in and of itself. But the subprime crisis was like a termite coming out of the wall. It made everyone start worrying that there were deeper problems.
In the past few years, there’s been an explosion of what the Street calls "structured credit" — everything from mortgages to loans used to finance LBOs was carved up into exotic new securities and sold to buyers who didn’t understand what they were purchasing. (For a close look at one such security, see Junk mortgages under the microscope.)
Would you buy a bridge from this man?Now it turns out that Wall Street didn’t understand its own mad, tangled creations either. A Bank of England official called the tests that financial firms used to measure the risk of these new products "completely hopeless." Firms from Citigroup (Charts, Fortune 500) to Merrill Lynch (Charts, Fortune 500) have declared multibillion-dollar write-downs due to losses on these products. And they’re still guessing.
In August a Morgan Stanley (Charts, Fortune 500) equity analyst recommended that investors buy the stock of insurer Ambac, which guarantees the payment on billions of dollars of bonds backed by subprime mortgages. A Morgan Stanley fixed-income trader promptly fired off an e-mail calling the recommendation "absurd." "My analyst has no idea how to value" the securities Ambac guarantees, he wrote. "No one in the world can put a definitive view on recovery levels" for some of these bonds.
The subprime crisis was also the first visible sign of a weird inversion that took place during the past few years. Instead of the value of an asset dictating the amount of debt you could use to purchase it, the availability of the financing began to dictate the price of the asset.
In 2004 even the Federal Reserve Bank of New York argued that a chunk of the increase in house prices was justified by the easing of lending standards. "The price exists at the pleasure of the financing," is how one hedge fund manager put it to me recently. "That is true for stocks and houses and bonds and buyouts." But if the financing doesn’t exist, or only maybe exists, then how do you determine price?
In early October a Craigslist posting, in which a self-described "spectacularly beautiful 25-year-old girl" asked for advice on meeting a man who made at least $500,000, sparked a raging debate on how you measure the value of a man or a woman.

How appropriate.

NEW YORK (Fortune) — A large Bank of America money market fund has over $600 million of exposure to Cheyne Finance, the structured investment vehicle (SIV) that recently defaulted on its obligations.
As of Oct. 12, Bank of America’s $67-billion Columbia Cash Reserves fund had approximately $640 million - or just under 1% of its assets - invested in Cheyne, according to Jon Goldstein, a Bank of America spokesman. "Up until now, Cheyne has been paying its maturities as they come due," Goldstein said. He added that Deloitte, the firm acting as receiver for Cheyne, said this week that it was pleased with the progress of efforts to refinance and shore up the troubled SIV.
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FORTUNE 500Current IssueSubscribe to FortuneVideoMore videoCNN’s Maggie Lake sits down with "Bonfire of the Vanities" author Tom Wolfe to discuss the stock market crash 20 years ago.Play video cnnad_createAd("401110","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=technology&cnn_money_section=quigo&pa rams.styles=fs","200","220");It’s but the latest blow to SIVs - large, lightly-regulated debt funds that have run into a liquidity squeeze as investors have balked at buying the securities that SIVs issue to fund themselves. Experts estimate that some $400 billion is tied up in SIVs. Banks like Citigroup (Charts, Fortune 500) have set up SIVs themselves and have been allowed to keep them off their balance sheets - an omission which causes problems for investors and regulators because they can’t easily gauge the banks’ true exposure to SIVs.
Banks and other financial firms are also exposed to the SIVs because they have bought securities issued by the SIVs. Along with banks like Bank of America (Charts, Fortune 500) and JP Morgan Chase, the U.S. Treasury is trying to organize support for the SIVs, because they fear that, without such help, the SIVs may have to sell off their assets to raise funds, which could drive markets lower. Friday’s steep dive in stock prices reflects, in part, fears that credit markets will deteriorate still further.
Beware banks’ bragging on earningsThus far, the SIV crisis has been almost exclusively contained among big institutional investors; the impact of SIVs on money market funds could be a development that brings the SIV problems into the lives of retail investors. As of Oct. 12, Bank of America’s Columbia Cash Reserve fund appeared to hold securities issued by at least five other SIVs, according to a list of holdings published on the fund’s website. Asscher Finance, Axon Financial Funding, Cullinan Finance, Five Finance, Sedna Finance and Whistlejacket Capital all appear on the fund’s list of holdings, and all appear on lists of SIVs published by rating agencies.
Because the public sees money market funds as very conservative investments, banks will almost always step in to support them and ensure that investors in them don’t take a loss on their original investment in the fund. Bank of America’s Goldstein says that investors in the Columbia Cash Reserves fund have not suffered such a loss. He adds that the vast majority of the SIV securities held in Bank of America money market funds have high credit ratings.
Money market funds like Columbia Cash Reserves typically take investors’ money and invest in short-term notes and bonds that carry very high credit ratings. However, in a bid to increase returns, some money market funds may have invested in debt securities that were not as safe as they looked, like the SIV securities.
While other lenders said no, this one said yesOther financial institutions have had to deal with the negative impact of SIVs on their money market funds. On Friday, Wachovia (Charts, Fortune 500) said it booked a $40 million loss related to the purchase of "certain asset-backed commercial paper" from money market funds run by its Evergreen asset management arm. (One of the things SIVs issue is asset-backed commercial paper, which is basically short-term debt that is collateralized with assets, although those assets may just be other types of debt.) It appears that the banking arm of Wachovia took that writeoff to make sure that its money market funds didn’t have to take a loss. "Evergreen has reduced and eliminated exposure to asset-backed commercial paper," says Laura Fay of Evergreen.
JP Morgan Chase also manages large money market funds. Just under 5% of the assets held by its $103 billion Prime Money Market fund are securities issued by SIVs. JP Morgan Chase (Charts, Fortune 500) declined to comment.
As of Sept. 30, Fidelity’s $305 billion of money market funds had 2.3% of their holdings - or about $7 billion - in SIV debt securities, according to company spokesman Alexi Maravel. The SIVs in question are Asscher Finance, Beta Finance, Centauri Corp., Dorada Finance, Cullinan Finance, K2 Finance, Links Finance and Nightingale Finance. Fidelity’s Maravel says: "We can state unequivocally that Fidelity’s money market funds continue to provide safety and security for our clients’ cash investments. We continue to invest in money market securities of the highest quality, and our clients continue to have full access to their holdings to invest as they wish."

Maravel adds that ensuring that investors never take a loss on their original investment in a money market fund "always has been our top objective when it comes to managing money market funds." And certainly that is what most money market customers believe is the case - but then few are likely to have known that some of their funds ended up in SIVs.

ATLANTA (CNN) — Gas prices rose a nickel during the past two weeks, to an average of $2.80 per gallon of self-serve regular, a national survey said Sunday.
That’s 60 cents more than prices at this time last year, but 38 cents below the all-time peak of $3.18 set on May 18, said Trilby Lundberg, publisher of the "Lundberg Survey."
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");The increases reported in the survey, which was carried out Oct. 19 and Oct. 5, will likely continue, she predicted.
"This nickel is a drop in the bucket," she said.
Over the same two-week period, the price of crude oil went up the equivalent of 18 cents per gallon.
That hike is not fully reflected at the pump because refiners, marketers and retailers have not passed it along, she said.
"The margin squeeze alone for refiners, marketers and retailers is enough to tell us that gasoline prices will continue to rise," she said.
The highest prices were in San Francisco, where drivers paid $3.17 per gallon of self-serve regular; and lowest in Newark, N.J., where they paid $2.56.
Here are some other cities’ prices:
Tulsa, Okla.: $2.63
Boston: $2.70
Atlanta: $2.72
Philadelphia, Pa.: $2.74
El Paso, Texas: $2.78

Salt Lake City: $2.82

WASHINGTON (AP) — The International Monetary Fund urged continued vigilance by finance ministers and central bankers to contain financial market turbulence and said it would try to determine what action to take to prevent future crises from erupting and damaging the global economy.
The IMF’s policy-setting committee also said in a statement Saturday that central banks in advanced countries, which have played a key role in containing financial market turbulence by injecting money, should focus on achieving price stability while keeping a close eye on inflation in the light of rising food and oil prices, among other factors.
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");The IMF committee meeting followed a session of the Group of 7 industrialized countries on Friday that pledged to limit the damage to the global economy caused when credit markets froze Aug. 9, triggered by troubles in the subprime U.S. mortgage market that then spread to many other kinds of debt in the U.S. and other countries.
The G-7 includes the United States, Canada, Britain, France, Germany, Italy and Japan.
With the G-7 and IMF meetings over, attention now turns to a meeting Sunday of the IMF’s sister institution, the World Bank and its policy setting committee, the first under its new president Robert Zoellick.
Zoellick, a former deputy secretary of state, trade representative and investment banker, took over from Paul Wolfowitz, a former defense secretary, who resigned in May in an ethics scandal.
Zoellick has been trying to "calm the waters" that were stirred by differences Wolfowitz had with some of the 185 member governments and the bank staff. A new strategy he has outlined would have the bank combat poverty, especially in Africa, help aid countries emerging from wars, and promote regional cooperation to combat disease and climate change.
Washington police said Saturday’s protests of the World Bank and the IMF annual meetings so far have been mostly peaceful.
That follows at least one violent incident Friday night in the upscale Georgetown neighborhood, 10 blocks east of the meeting site. Many of the delegates to the IMF and bank meetings stay at hotels in Georgetown and eat in its restaurants.
One woman was hit in the head by a thrown brick. It was unclear how badly she was injured.
In an attempt to soothe jittery markets, the IMF statement urged "continued vigilance to maintain well-functioning financial markets."
The ministers said they would continue "to work together to analyze the nature of the disturbances and consider lessons to be learned and actions needed to prevent further crises."
"The turbulence has revealed a number of problems that may be deeper than the specific episode that triggered the tensions," said Italian Economy Minister Tommaso Padoa-Schioppa, the new head of the IMF’s policy-making committee.
The head of the IMF, Spain’s Rodrigo de Rato, was optimistic despite the recent concerns about the credit market.
"The global economy is expanding from a solid foundation," he said.
The IMF statement said global economic growth was moderating amid disturbances in financial markets, but financial growth in countries with fast-growing economies and "strong fundamentals" continue to support the world economy.
Ministers said the financial innovation that led to the packaging of securities based on subprime mortgages in the U.S. "while having contributed to enhanced risk diversification and improved market efficiency have also created some new challenges that need to be properly addressed."
Padoa-Schioppa said that some of the institutions involved in the packaging needed to be monitored.
"There is a clear need for supervisory audits even for the great financial institutions that create these instruments, to understand better what their creations are doing out on the market. This is clearly a reason for concern," he said.
Padoa-Schioppa paid tribute to de Rato, thanking for his leadership over the past 3 1/2 years. He is leaving Oct. 31 and will be replaced by France’s Dominique Strauss-Kahn.

Under an informal arrangement dating to the founding of the IMF and the bank 63 years ago, an American leads the bank and a European heads the fund. Critics say the process is outmoded and should be open to the best qualified candidates.

WASHINGTON (AP) — The jarring credit crisis has increased risks to the global economy, which nonetheless remains strong overall, Treasury Secretary Henry Paulson said Saturday.
He said the stress in the financial markets is a reminder of the need for continued vigilance by governments.
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"Fortunately, the global economy’s underlying strengths should limit the negative effects that the turmoil might have on global activity," Paulson said at the annual meeting of the International Monetary Fund’s policy-setting committee. "We need to learn from these events and take steps to address the policy issues that arise."
He said real growth is expected once again to be near 5 percent this year and next, with emerging markets such as China, India and Brazil providing over half that gain.
Presiding over the session for the first time was Italy’s economy minister, Tommaso Padoa-Schioppa. He succeeded Britain’s former finance minister, Gordon Brown, who held the post for nearly 10 years until he became prime minister this year.
The IMF job was widely expected to go to India’s finance minister, Palaniappan Chidambaram, a move that would have demonstrated that rich countries were willing to cede some of their dominance of the IMF.
The 185-member Washington-based organization aids countries in financial crisis and makes loans to poor nations. It has been criticized for not allowing countries with fast growing economies to have more of a say in IMF decisions.
Under an informal practice dating to the founding 63 years ago of the IMF and its sister institution, the World Bank, an American heads the bank and a European leads the fund.
Paulson said the credit crisis will impose some penalty on the U.S. economy, the world’s largest. "But I expect continued growth," he said.
He urged the IMF to take a leading role in establishing sound practices for sovereign wealth funds, which are huge pools of capital controlled by governments ranging from China to Kuwait.
"The IMF is uniquely positioned to identify best practices for sovereign wealth funds, building on existing guidelines for foreign exchange management," Paulson said.
These funds have attracted the attention of policymakers as the size of the funds’ assets — estimated at $2.5 trillion — has exploded and their activity in financial markets has increased.
Developed countries, the recipients of much of the investment from the wealth funds, worry that growing cross-border investment could feed protectionism. They want the funds to be more open about their holdings and operations.
"Best practices would provide multilateral guidance to new funds on how to make sound investments on how to structure themselves, mitigate any potential systemic risk and help demonstrate to critics that sovereign wealth funds can be constructive, responsible participants in the international financial system," Paulson said.

Officials from China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates — all of which operate such funds — took part in a dinner Paulson hosted Friday night at the conclusion of the Group of Seven meeting of finance ministers and central bank governors from wealthy industrialized nations.

WASHINGTON (AP) — The jarring credit crisis has increased risks to the global economy, which nonetheless remains strong overall, Treasury Secretary Henry Paulson said Saturday.
He said the stress in the financial markets is a reminder of the need for continued vigilance by governments.
cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"Fortunately, the global economy’s underlying strengths should limit the negative effects that the turmoil might have on global activity," Paulson said at the annual meeting of the International Monetary Fund’s policy-setting committee. "We need to learn from these events and take steps to address the policy issues that arise."
He said real growth is expected once again to be near 5 percent this year and next, with emerging markets such as China, India and Brazil providing over half that gain.
Presiding over the session for the first time was Italy’s economy minister, Tommaso Padoa-Schioppa. He succeeded Britain’s former finance minister, Gordon Brown, who held the post for nearly 10 years until he became prime minister this year.
The IMF job was widely expected to go to India’s finance minister, Palaniappan Chidambaram, a move that would have demonstrated that rich countries were willing to cede some of their dominance of the IMF.
The 185-member Washington-based organization aids countries in financial crisis and makes loans to poor nations. It has been criticized for not allowing countries with fast growing economies to have more of a say in IMF decisions.
Under an informal practice dating to the founding 63 years ago of the IMF and its sister institution, the World Bank, an American heads the bank and a European leads the fund.
Paulson said the credit crisis will impose some penalty on the U.S. economy, the world’s largest. "But I expect continued growth," he said.
He urged the IMF to take a leading role in establishing sound practices for sovereign wealth funds, which are huge pools of capital controlled by governments ranging from China to Kuwait.
"The IMF is uniquely positioned to identify best practices for sovereign wealth funds, building on existing guidelines for foreign exchange management," Paulson said.
These funds have attracted the attention of policymakers as the size of the funds’ assets — estimated at $2.5 trillion — has exploded and their activity in financial markets has increased.
Developed countries, the recipients of much of the investment from the wealth funds, worry that growing cross-border investment could feed protectionism. They want the funds to be more open about their holdings and operations.
"Best practices would provide multilateral guidance to new funds on how to make sound investments on how to structure themselves, mitigate any potential systemic risk and help demonstrate to critics that sovereign wealth funds can be constructive, responsible participants in the international financial system," Paulson said.

Officials from China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates — all of which operate such funds — took part in a dinner Paulson hosted Friday night at the conclusion of the Group of Seven meeting of finance ministers and central bank governors from wealthy industrialized nations.

NEW YORK (AP) — A gauge of future economic activity edged higher in September, suggesting the economy may trudge forward at a modest pace despite a worsening housing slump.
The Conference Board said Thursday its index of leading economic indicators rose 0.3 percent in September to 137.9, slightly below analysts’ consensus forecast for a 0.4 percent rise. The modest growth follows a sharp 0.8 percent drop in August. The index has been erratic this year - rising one month and falling the next - but overall, growth has been flat.
VideoMore videoDeloitte Touche Tohmatsu CEO James Quigley joins CNN to discuss rising oil prices and economy fears.Play video cnnad_createAd("353931","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=220×200_ctr&cnn_ money_rollup=business_news&cnn_money_section=jobs_ and_economy&cnn_money_subsection=quigo&params.styl es=fs","200","220");"You have an economy sputtering, in which some parts are trying to regain momentum, while other parts like the housing market are losing steam," said Ken Goldstein, labor economist at the Conference Board. "The question is, how long will it remain that choppy?"
The index is designed to predict economic activity in the coming three months.
Seven of the 10 data points tracked by the Conference Board increased last month, the strongest of which were vendor performance, the job market and stock prices. The housing market continued to lag.
The September reading only partially reflects the Federal Reserve’s decision to lower key interest rates at mid-month, Goldstein said. The Fed cut its benchmark federal funds rate Sept. 18 by a half percentage point to 4.75 percent, a move that helped loosen credit conditions and ease turmoil in the financial markets.
Research group says economy will lose steamPeter Cardillo, chief market economist at brokerage Avalon Partners Inc., expects slower growth, as weakness in the housing market weighs on the economy but other, stronger areas provide some expansion.
"While third-quarter growth is likely to come close to 3.9 percent, fourth-quarter growth could come in under 2 percent," he said. However, he added that "none of the indicators point to recession."
Investors are now awaiting the Fed’s Oct. 30-31 meeting, when the central bank will decide its next move on interest rates. Expectations surrounding that decision have been in flux; this week’s dismal housing market data have helped shift market sentiment toward another cut.
The Commerce Department said Wednesday that homebuilding dropped to its lowest level in 14 years last month. That "probably once again reverses in favor of another rate cut as an insurance policy on the part of the Fed to keep the economy growing, even at weak levels," Cardillo said.

The Conference Board’s coincident index, which measures where the economy is at present, rose 0.2 percent in September. Its lagging index rose 0.5 percent.