Posts Tagged ‘Ben Bernanke’
Wednesday, December 7th, 2011
In a stunning revelation, Bloomberg has obtained 29,000 pages of Federal Reserve documents detailing the largest bailout in American history. According to an article that will appear in the January issue of Bloomberg Markets magazine, the “Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”
The $7.77 trillion that the central bank made available stunned even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009. According to Stern, he “wasn’t aware of the magnitude.” It overshadows the Treasury Department’s better-known $700 billion Troubled Asset Relief Program (TARP) program. When you add up guarantees and lending limits, it becomes clear that the Fed had committed $7.77 trillion as of March, 2009 to rescuing the financial system. That is more than half the value of the U.S. GDP that year. “TARP at least had some strings attached,” said Representative Brad Miller (D-NC), a member of the House Financial Services Committee. “With the Fed programs, there was nothing.”
According to Bloomberg’s editors, “Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy. Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse. By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.
“The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble. That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis. Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.”
Derek Thompson, a senior editor at The Atlantic, argues that the Fed’s secret bailout is a sign that it was doing its job. According to Thompson, “First, you can be furious that the Federal Reserve ‘committed’ $7.7 trillion — a sum of money equal to half of the U.S. economy — to save the financial system. I understand the shock, but we were at the precipice of catastrophe and that money wasn’t ‘spent’ so much as it was put at risk and subsequently recouped. The economy has struggled in the three years since, but we avoided meltdown. The trillions worked.
“Second, you can be furious that the banks made a profit off of their own mistakes — but $13 billion is a small price to pay for staving off Armageddon. Third, you can be furious that the Federal Reserve went to court to keep this information out of the hands of journalists. There, I’d agree. It’s Congress’s job (not the Federal Reserve’s job) to pass laws that govern the banking sector, but Congress needs information to make good decisions about regulating banks and it’s disappointing that the Federal Reserve withheld details about its bailouts while the commission and the Dodd-Frank debate were ongoing. Fourth, you can be furious that our central bank basically did the right thing when it had to, and its counterpart in Europe won’t — at the risk of a continental meltdown.”
Times’ Massimo Calabresi agrees. According to Calabresi, “But the Fed saved the world economy through all this lending without losing a penny in the process. And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself. ‘Supporting financial-market stability in times of extreme stress is a core function of central banks,’ said William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.’ In other words, lending money to banks in a crisis is the whole point of the Fed: saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do.”
The Fed has been lending money to banks since just after it was established in 1913. By the end of 2008, the Fed had created or expanded 11 lending facilities catering to financial firms that were unable to obtain short-term loans from their usual sources. “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
Tags: bailout, Ben Bernanke, Bloomberg, Committee, congress, Division of Monetary Affairs, Dodd-Frank Wall Street Reform and Consumer Protection Act, Federal Reserve, Freedom of Information Act, GDP, House Financial Services, Occupy Wall Street movement, Treasury Department, Troubled Asset Relief Program, Wall Street
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Wednesday, October 5th, 2011
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”
Tags: Ben Bernanke, congress, consumer spending, Debt-ceiling battle, economic stimulus, exports, Federal Reserve, Federal Reserve Bank of Kansas City, GDP, interest rates, Jackson Hole, Nuveen Asset Management, Obama administration, QE3, Springer Financial Advisors, WY
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Tuesday, September 13th, 2011
Home prices revived somewhat during the 2nd quarter, but the housing market is still struggling. Prices climbed an impressive 3.6 percent, compared during the three months ending March 31. Despite the upbeat news, home prices are still down 5.9 percent compared with the 2nd quarter of 2010. The rise in home prices came after three straight quarters of drops, the S&P/Case-Shiller national index — a recognized gauge of residential real-estate markets — reported. The year-over-year decline was slightly more than the than the 4.7 percent drop that had been forecast by a consensus of experts at Briefing.com. A separate monthly index of home prices in 20 major metro areas reported a month-over-month gain of 1.1 percent for June, and a 4.5 percent decline compared with last year.
The quarter-over-quarter price increase may be the last one for a while, said Stan Humphries, chief economist for the real estate website Zillow. He expects prices will weaken again. “The August turmoil of credit rating downgrades, negative GDP revisions, stock oscillations and European debt woes are likely to leave a mark on both August home sales and home value appreciation,” according to Humphries. “Monthly home value appreciation in June may mark the last hurrah before beginning to weaken in the back half of this year,” Humphries said.
Foreclosures still constituted a higher proportion of sales throughout the winter and spring as families took a break from home shopping; cash-rich investors dominate the market. Nationally, home prices have returned to their 2003 levels.
Chicago, Minneapolis, Washington and Boston saw the largest monthly increases. Cities hit hardest by the housing crisis, such as Las Vegas and Phoenix, reported small seasonal increases. Housing has remained a drag on the economy and is one of the most important reasons why it is still struggling to recover two years after the recession officially ended. Home sales in 2011 are likely to be at the lowest level in 14 years. Home prices in many cities have reached their lowest points since the market bubble burst more than four years ago. Home prices in Cleveland, Detroit, Las Vegas, Phoenix and Tampa are at 2000 levels. “These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together,” said David M. Blitzer, chairman of the S&P’s index committee. “This month’s report showed mixed signals for recovery in home prices. No cities made new lows in June 2011, and the majority of cities are seeing improved annual rates,” Blitzer said. “Looking across the cities, eight bottomed in 2009 and have remained above their lows. These include all the California cities plus Dallas, Denver and Washington D.C., all relatively strong markets.”
“There’s no theoretical floor for prices. If the economy worsens, housing will get into a vicious cycle of falling prices and foreclosures,” said Mark Zandi, chief economist at Moody’s Analytics. “When prices fall, confidence wanes.”
Foreclosures and short sales — when a lender sells for less than what is owed on a mortgage – accounted for approximately 30 percent of all home sales in July, an increase from about 10 percent reported in normal years. Nearly 1.7 million potential foreclosures are being delayed, according to real estate firm CoreLogic, either by backlogged courts or lenders waiting for the conclusion of state and federal investigations into questionable foreclosure practices.
“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto. “Most people think that when the downturn ends the recovery will be pretty good, but that’s not going to be the case at all.”
“Consumer confidence is still weak, and the housing sector remains in a fragile state,” According to Robert Toll, chairman of Toll Brothers, Inc. the nation’s largest luxury homebuilder. “The nation’s economy continues to suffer from the lack of jobs in housing construction and the related manufacturing and service sectors that a decent new-home market would typically generate.”
Federal Reserve Chairman Ben Bernanke said “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” are hurting the housing market.
Lawrence Yun, chief economist at the National Association of Realtors, described the activity as “underperforming. The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”
Tags: Ben Bernanke, Briefing.com, Capital Economics Ltd., CoreLogic, Credit-rating downgrades, European debt woes, Federal Reserve, foreclosures, GDP, home prices, Inc., Moody’s Analytics, mortgages, National Association of Realtors, recession, S&P/Case-Shiller National Index, short sales, Toll Brothers, Zillow
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Monday, July 11th, 2011
American households’ net worth moved up a bit as the year began, with rising stock prices, increased savings and debt reductions outpacing an ongoing decline in real-estate prices. According to the Federal Reserve, average household wealth in stocks, bonds, homes and other assets — minus mortgages and other debts — rose 1.2 percent to $58.1 trillion during the 1st quarter. The increase is likely to boost the economy, because as peoples’ net worth increases, they tend to become more confident about their financial future and more willing to spend. Noting the recent decline in stock prices, “in general, financial wealth has been increasing, which would tend to increase consumer spending,” said Goldman Sachs economist Andrew Tilton.
Even though Americans’ net worth rose to its highest level since the middle of 2008, it remained significantly below the peak of $65.8 trillion in June 2007. Additionally, the upsurge has been driven primarily by stock prices, which benefit people who have invested their money. The significantly larger percentage of Americans who have the majority of their wealth in their homes is still feeling the continuing real-estate slump.
Paul Ashworth, who owns Ashworth Drugs, a pharmacy in Cary, NC, says his retirement portfolio has recovered somewhat in recent years, but still is more than 20 percent less than its level when the recession began. The Ashworth family has curtailed dining out and scrapped its subscriptions to the ballet and symphony. “The bounce hasn’t really made me feel better at all,” Ashworth said. “I still have a job, but I don’t feel as secure. We don’t feel as good about getting out and spending as we used to.”
The Fed’s quarterly overview of American household, business, bank and government finances showed that companies are accumulating profits rather than spending them. Cash holdings and other liquid assets rose 2.6 percent to $1.91 trillion. At 6.8 percent of total assets, the level of cash reached its highest level in nearly 50 years. Debt levels in budget-crunched state and local governments showed slight declines, but that was outpaced by an increase in federal debt. Government debt rose two percent to $12.1 trillion during the 1st quarter.
Meanwhile, the value of real-estate assets continued their decline, falling 1.9 percent to $18.1 trillion. The ongoing decline in housing is hurting consumer spending. During the housing boom of the last 10 years, many homeowners extracted wealth from their houses through mortgage refinancing and home-equity loans, which spurred spending. Now, with many homeowners owing more on their mortgages than their properties are worth, that is no longer occurring. Instead, many consumers are skeptical about the recovery’s strength and are still not spending on home improvements.
Writing on the Reason.com blog, Tim Cavanaugh says that “You know what you almost never hear about anymore? How the American consumer will lead the way to an economic recovery. Just a year ago learned pundits were holding out hope for another consumer-led recovery. The New York Times was still clinging to the consumerist wreckage as recently as May. In December, the remarkably durable idea that U.S. consumers will restore prosperity was still generating such brilliantly tautological news as ‘Consumers give boost to holiday sales.’ But the mirage of the consumer-led recovery has been fading for years. Retail sales rose 0.6 percent in the month of December, an increase that fell well below expectations of 0.8-0.9 percent, and a letdown after a Festivus season filled with tales of confident, resurgent shoppers.”
The 1st quarter of 2011 is not the only time during the Great Recession when household wealth grew. John Ryding, chief economist at RDQ Economics, notes that household net worth grew by $5 trillion between the 1st and 3rd quarters of 2009, after declining sharply earlier in the recession. Additional spending generated by the rebound helped keep the savings rate from climbing to seven or eight percent. Household savings encourage long-term economic vitality, but a rapid upward adjustment makes consumer-spending growth more difficult to achieve in the near term — a phenomenon known as the “paradox of thrift.” If the savings rate remains relatively static or rises slowly, it would remove one of the headwinds to consumer-spending growth in the near future. That would be a bullish sign for the economy, because consumer spending accounts for roughly 70 percent of GDP.
Tags: Ben Bernanke, Cash, Federal Reserve, Festivus, GDP, Government debt, Great Recession, home equity loans, Home improvements, household income, Mortgage refinancing, Reason.com, Stocks
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Tuesday, June 21st, 2011
Now that QE2 (quantitative easing 2) is winding down – and with the economy sputtering – will Federal Reserve chairman Ben Bernanke call for a new round of stimulus in the form of QE3? The answer likely is “no”, although it’s doubtful that the Fed will tighten monetary policy until the economy is stronger. The central bank’s strategy has been to buy Treasury bonds to increase the money supply and foster growth. The second round of such purchases, worth $600 billion, ends June 30.
Writing in the Washington Post, Neil Irwin says that “The lousy unemployment report comes on the heels of other disappointing economic data, but Fed officials view the current situation as different from the conditions that led to last year’s bond buying. The recent round of data is neither alarming enough nor definitive enough to make them reconsider the unconventional monetary policy. For one, much of the economic slowdown in the first half of the year was likely driven by temporary factors. The Japanese earthquake and tsunami appear to have disrupted the supply chain at U.S. factories more than initial forecasts, contributing to the drop in manufacturing activity and May’s sluggish employment report. And although oil prices spiked earlier in the year, they have ebbed downward since late April.”
Mohamed A. El-Erian, CEO and Co-CIO of Pimco, agrees, noting that “Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3. This view is based on an assessment of economic, political and international factors. As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference, policy measures should be judged in terms of the expected balance of benefits, costs and risks. I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences. It is also clear that, in its attempt to deliver ‘good’ asset price inflation (e.g., higher equity prices), the Fed also got ‘bad’ inflation. The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption — thus countering the objective of QE2.”
There’s also the point that QE2 has had mixed results. According to Bernanke, “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation…has risen to historically more normal levels.”
Philadelphia Fed President Charles Plosser warns that QE2 provides excessive stimulus: The central bank has “a trillion-plus excess reserves,” he noted, which could be “the fuel for inflation.” Anticipated inflation could explain the sudden increase in long-term yields that began last November. But the rate for 10-year Treasury Inflation Protected Securities (TIPS), rose at the same time, which contradicts that interpretation. At the same time, the five-year TIP rate didn’t rise. Had that rate increased, there would have been a sign of a stronger economy in the next five years.
UBS thinks that QE2 failed and is strongly opposed to another round of stimulus. Maury N. Harris, UBS’ Managing Director and Chief Economist for the Americas, says that “The evidence that QE2 boosted economic activity is lacking. Yields moved higher and equity markets did as well, although the latter was justified by rising corporate earnings. They importantly reflected better volumes, which probably cannot be traced to any believable instantaneous response to policy that works with a lag. Despite the recent weakness in the data, we continue to view the recent slowing as insufficient to prompt further QE from the Federal Reserve. Relative to conditions in August 2010, when QE2 was floated by Chairman Bernanke, labor market conditions are better. Additionally, the threat of disinflation last fall has given way to a somewhat more disturbing build-up in inflation pressures as core inflation continues to accelerate.”
Tags: Ben Bernanke, Disinflation, Federal Reserve, inflation, Japanese earthquake and tsunami, monetary policy, oil prices, Pimco, QE3, stagflation, Supply chain, Treasury bonds, Treasury Inflation Protected Securities, UBS, Wall Street
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Wednesday, May 18th, 2011
The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke. “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference. “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said. The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.
Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said. Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems. If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.” As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.” Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight. When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened. According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.
Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance. “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said. “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”
Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies. “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.
Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally. Some are working to cut funding for agencies established by the law and limit the scope of new rules. According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.
Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”
To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.
Tags: bank regulators, Bank stress tests, Ben Bernanke, Dividends, Dodd-Frank Act, Federal Open Market Committee, Federal Reserve, Federal Reserve Bank of Chicago’s Bank Structure & Competition, financial crisis, Financial Stability Oversight Council, General Accounting Office, Great Depression, job creation, Shareholders, Sovereign-debt concerns, systemic risk
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Monday, May 9th, 2011
Ben Bernanke’s first-ever press conference is important because the unprecedented move gives the world a look at the inner workings of the often arcane Federal Reserve. As a general rule, the Fed’s chairman avoids press conferences. Typically they issue statements that are worded with extreme care. Since the economic meltdown, however, the Fed’s increased role in crafting the nation’s fiscal policy has been under the microscope. As a result Bernanke decided to start holding press conferences every few months “to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication”
Veteran Fed watchers say Bernanke will avoid make any unexpected observations about the economy. The Fed almost certainly won’t raise interest rates or change the course of the Quantitative Easing 2 (QE2) program to boost economic recovery. What makes the event important is that it is a new chapter in the history of U.S. central banking, one that brings transparency that allows the Federal Reserve to make its case for monetary policy directly to the American people. The press conference, “whose ostensible purpose is to add more transparency regarding Fed policy, is really designed to help repair its image with the general public, a process that began when Bernanke first appeared on ’60 Minutes,’” writes Bernie Baumohl, chief economist at The Economic Outlook Group. “The press conference serves multiple purposes. It helps explain the Fed’s role in the economy, improves public trust in the central bank, and can be used discreetly as a platform to place more pressure on Congress to reduce the swelling budget deficits.” During the financial crisis, some criticized the Federal Reserve’s role in the economy, with conservative Tea Party movement members calling for a dissolution of the Fed or a Congressionally-mandated opening up of the once-secretive central bank. The press conference is intended to silence the critics by providing certain details that were previously denied.
The Fed is notoriously tight lipped. Until 1994, the Fed never notified’ the public of policy changes, leaving an army of Wall Street “Fed watchers” to figure them out for themselves. The Federal Open Markets Committee (FOMC) did not release statements on a regular basis until 1999. The majority of Fed chairmen have shied away from the cameras. Now, Bernanke is welcoming them. Although Bernanke excels at not saying anything newsworthy, the timing of the first press conference comes at a particularly sensitive time: shortly before the end of the controversial QE2 monetary policy program, and during an argument over inflation. Bernanke and other FOMC members, such as Fed Vice Chairwoman Janet Yellen, argue that inflation remains subdued: Demand is slack, and core inflation below-target. But not everyone shares that view. More hawkish Fed officials, such as Thomas Hoenig of the Kansas City Fed, have pointed to frothiness in oil, food, and commodities markets to make loud calls for tightening.
Writing in the Atlanta Journal Constitution Washington Insider columnist Jamie DuPree says that “Ben Bernanke starts what will be the first of four annual news conferences about the work of the Fed. The job of Fed Chairman has always been a little mysterious, feeding a variety of conspiracy theories about its work and ties to other groups like the Trilateral Commission and more. The news conferences will take place four times a year, after the Fed meets for its quarterly policy-making meeting, where announcements are made on interest rates and economic policy. Bernanke is no stranger to the limelight, as he testifies regularly on Capitol Hill, taking questions from lawmakers. But Fed Chairs usually don’t do press conferences – and you don’t have to have much of an imagination to wonder if there could be some odd questions thrown his way. In fact, Fed Chairs often don’t do interviews either, making his twice-per-year testimony before the Congress a big story to cover. Because the insight of the Fed Chairman is so important to the markets, the Federal Reserve does not want the testimony leaked early, for fear that someone could use it to manipulate trading in some way.”
Tags: Atlanta Journal Constitution, Ben Bernanke, congress, Economic meltdown, economic recovery, Fed Watchers, Federal Open Markets Committee, Federal Reserve, financial markets, Global markets, inflation, Janet Yellen, Joint Economic Committee, Kansas City Fed, Press conference, Quantitative Easing 2 (QE2), Tea Party movement, The Economic Outlook Group, Thomas Koenig, Trilateral Commission, “60 Minutes”
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Monday, May 2nd, 2011
The Federal Reserve is unlikely to follow the European Central Bank’s (ECB) recent decision to raise interest rates and will hold off until there is looming inflation. The ECB’s move may be the first of several this year as high oil costs drive consumer prices above its target. That’s not to say that some members of the Fed’s policy-setting committee are not proposing an increase in the overnight lending rate by three quarters of a percentage point by the end of 2011.
Fed Chairman Ben Bernanke and New York Fed president William Dudley both believe that the economy is still to weak to remove support. “The old analogy that the Federal Reserve removes the punch bowl just when the party gets going doesn’t apply here because, well, there is no party,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, NJ. “There’s not even a balloon in sight.”
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, also sees the ECB’s move as having minimal impact on the Fed. “I don’t see that a move by the ECB has any particular influence on our policy posture here in the United States,” Lockhart said. “Obviously by increasing the differential between short-term rates in the U.S. and short-term rates in the eurozone, you can see some influence” because “exchange markets are affected by short-term rates. I think some of the dollar selloff reflects some extent of that.”
The ECB “will hike twice in quick succession in April and June to satisfy the core economies’ demand for tighter policy,” said Stuart Thomson, a Glasgow-based money manager at Ignis Asset Management, which oversees about $120 billion. “But the sensitivity of the peripheral economies to higher rates, both in terms of overall debt and proportion of consumer loans tied to variable interest rates, means the central bank will pause over the summer.”
The Frankfurt-based ECB raised its refinance rate to 1.25 percent from just one percent, the first increase since July 2008. The ECB also boosted other rates by a quarter point, raising its marginal lending facility rate to two percent and its overnight deposit facility rate to 0.5 percent. According to ECB President Jean-Claude Trichet, “We did not decide it was the first of a series of rate increases,” emphasizing that the central bank will “always do what is necessary” to assure that inflation expectations across the 17-nation eurozone are given due consideration.
The ECB has forked over billions of dollars in the last year, purchasing bonds from troubled European nations such as Greece, Ireland and Portugal – all of which have been bailed out by the European Union – to assure that they stay afloat. The bank, whose intention is to focus on inflation is raising interest rates to combat rising prices, a major concern in Germany, which is the ECB’s most influential member.
“The ECB has decided that it will tighten policy for the core countries like Germany that are doing well and leave the non-standard measures support in place for the periphery countries,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc. “The rate increase is appropriate and there will be another one as early as June.”
Tags: Ben Bernanke, Dennis Lockhart, Economic Outlook Group, European Central Bank, European Union, Euros, Eurozone, Federal Reserve, Federal Reserve Bank of Atlanta, Germany, Greece, Ignis Asset Management, inflation, interest rates, Ireland, Jean-Claude Trichet, New York Fed, Overnight lending rate, Portugal, Royal Bank of Scotland Group Plc, unemployment, William Dudley
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Tuesday, April 5th, 2011
The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities. The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009. The Fed’s previous record high earnings was $53.4 billion.
In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets. Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet. The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses. So far the Fed’s crisis-lending programs have earned handsome profits. The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market. As of last week, the Fed held a virtually identical quantity of such securities.
The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities. Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis. To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.
Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG). The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering. ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng. The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds. Maybe the Fed can do better in the marketplace.”
Tags: AIG, Ben Bernanke, central bank, Federal Reserve, financial crisis, mortgage-backed securities, Profits, securities, Sub-prime mortgage bonds, Treasury Department, Wall Street Journal
Posted in Economics, Financing, General, Industrial, Office, Residential | 1 Comment »
Wednesday, March 30th, 2011
The Federal Reserve‘s second round of stress tests requires the 19 largest U.S. banks to examine their capital levels against a worst-possible-case scenario of another recession with the unemployment rate hovering above 8.9 percent. The banks were instructed to test how their loans, securities, earnings, and capital performed when compared with at least three possible economic outcomes as part of a broad capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans in January. The Fed will complete its review in March.
“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’” said Jonathan Hatcher, a credit strategist at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help later,” he said.
The review “allows our supervisors to compare the progress made by each firm in developing a rigorous internal analysis of its capital needs, with its own idiosyncratic characteristics and risks, as well as to see how the firms would fare under a standardized adverse scenario developed by our economists,” Fed Governor Daniel Tarullo said. Although Fed policymakers aren’t predicting another slump any time soon, they want banks to be prepared for one. In January, the Federal Open Market Committee forecast a growth rate of 3.4 percent or more annually over the next three years, with the jobless rate falling to between 6.8 percent and 7.2 percent by the 4th quarter of 2013. Unemployment averaged 9.6 percent in the 4th quarter of 2010.
The new round of stress tests are being overseen by a financial-risk unit known as the Large Institution Supervision Coordinating Committee (LISCC). The unit relies on the Fed’s economists, quantitative researchers, regulatory experts and forecasters and examines risks across the financial system. Last year, the LISCC helped Ben Bernanke respond to an emerging liquidity crisis faced by European banks. “The current review of firms’ capital plans is another step forward in our approach to supervision of the largest banking organizations,” Tarullo said. “It has also served as an occasion for discussion in the LISCC of the overall state of the industry and key issues faced by banking organizations.”
At the same time, Bernanke expressed his support for the Dodd-Frank Act, which will add new layers of regulation to the financial services industry, as well as the Consumer Protection Act. “Dodd-Frank is a major step forward for financial regulation in the United States,” Bernanke said, noting that the Fed is moving swiftly to implement its provisions. Additionally, the Fed wants banks to think about how the Dodd-Frank Act might affect earnings, and how they will meet stricter international capital guidelines. Banks will have to determine how many faulty mortgages investors may ask them to take back into their portfolios. Standard & Poor’s estimates that mortgage buybacks could carry a $60 billion bill to be paid by the banking industry.
In the meantime, the big banks are feeling adequately cash rich to pay dividends to their stockholders. Bank of America’s CEO Brian T. Moynihan said that he expects to “modestly increase” dividends in the 2nd half of 2011. “We’d love to raise the dividend,” James Rohr, CEO of PNC, said. “We’re hopeful of hearing back in March from the regulators.” JPMorgan CFO Douglas Braunstein told investors that the bank asked regulators for permission to increase the dividend to 30 percent of normalized earnings over time. Braunstein said that JPMorgan’s own stress scenario was more severe than the Fed’s, and assumed that the GDP fell more than four percent through the 3rd quarter of this year with unemployment peaking at 11.7 percent.
Clive Crook, a senior editor of The Atlantic, a columnist for National Journal, and a commentator for the Financial Times, believes that United States fiscal policy itself merits examination. Writing in The Atlantic, Crook says that “Fiscal policy needs a hypothetical stress test, just like bank capital. Let’s be optimistic and suppose that the deficit projections do hold, and that a debt ratio of 80 percent can be comfortably supported at full employment. What happens when we enter the next recession with debt at that level? Assume another really serious downturn, and another 30-odd percentage points of debt. Worried yet? That’s why the problem won’t wait another ten years, and why sort-of-stabilizing at 80 percent won’t do.”
Tags: Bank of America, Bank stress tests, Ben Bernanke, capital, Capital levels, Consumer Protection Act, Daniel Tarullo, Dividends, Dodd-Frank Act, Earnings, Federal Open Market Committee, Federal Reserve, financial crisis, financial reform, financial services, GDP, Inc., industry, Jeffries Group, JPMorgan Chase PNC Financial Services Group, Large Institution Supervision Coordinating Committee, loans, Mortgage buybacks, recession, Regulators, securities, Standard & Poor’s, Stockholders, unemployment, Wall Street reform
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