Posts Tagged ‘Ben Bernanke’
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
Posted in Economics, Financing, General | No Comments »
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
Posted in Economics, General | No Comments »
Monday, February 21st, 2011
Federal Reserve Chairman Ben Bernanke is knocking heads with Representative Paul Ryan (R-WI), the new chairman of the House Budget Committee, about how to best control inflation while buying billions of dollars worth of Treasury bonds to build up the economy in a process called quantitative easing 2 (QE2). As the nation’s debt climbs to an unprecedented high level, President Obama is in the difficult position of having to forge an agreement with Congress on how high the legal cap on how much money the government can borrow will be. The Republicans who now control Congress say they will consent to an increase in the cap only if President Obama agrees to make significant budget cuts. Ryan has been an outspoken opponent of the Fed’s stimulus policy, which is pumping $600 billion into the economy through purchases of long-term Treasuries. He is concerned that the policy will accelerate inflation, create asset bubbles and reduce the dollar’s value. “My concern is that the cost of the Fed’s current monetary policy…will come to outweigh the perceived benefits,” Ryan said. “We are already witnessing a sharp rise in a variety of key global commodities and basic material prices.”
Bernanke disagreed, saying “The inflation is taking place in emerging markets because that’s where the growth is.” In the United States, he said, “overall inflation is still quite low and longer-term inflation expectations have remained stable.” Bernanke pointed to growth in economies like China, India and Brazil as the real cause of rising prices.
Speaking in a different venue, Treasury Secretary Timothy Geithner expressed confidence that Congress ultimately will raise the debt limit. “I can say this with complete confidence – that the U.S. will meet its obligations, that Congress will act as it always has to make sure we meet those obligations,” Geithner said. “There’s always a little political theater around this.”
Democrats and Republicans remain sharply divided on the issue. “It would be reckless from an economic and financial perspective…to essentially default on our debts and question the creditworthiness and full faith and credit of the United States, correct?” asked Representative Chris Van Hollen (D-MD) “Wouldn’t significant reductions or addressing the short-term spending aspect be good for the market and economy?” asked Representative Scott Garrett (R-NJ).
Representative Ron Paul (R-TX) and a Libertarian characterized Bernanke’s testimony as “cocky”. Paul, a 2008 presidential candidate who is a long-term critic of the Federal Reserve, now has a platform to air his views, thanks to the Republicans winning control of the House. As chairman of the House Domestic Monetary Policy and Technology Subcommittee, Paul called the hearing to examine the impact of the Fed’s policies on job creation and the unemployment rate. Paul has advocated for measures that would review the Federal Reserve or even eliminate it. Additionally, Paul slammed the Fed’s latest $600 billion bond-buying program, saying it and near-zero interest rates haven’t led to job creation in the United States.
Tags: Ben Bernanke, Capitol Hill, congress, Corporate tax rates, economic recovery, Federal Reserve, House Budget Committee, House Domestic Monetary Policy and Technology Subcommittee, inflation, Libertarian, Long-term Treasuries, monetary policy, President Barack Obama, Quantitative easing, Representative Chris Van Hollen, Representative Chris Van Hollen (D-MD), Representative Paul Ryan, Representative Ron Paul, Representative Scott Garrett, Republican-led House, Timothy Geithner, Treasury Department, unemployment rate
Posted in Economics, Financing, General, Green, Office, Residential | No Comments »
Monday, January 31st, 2011
Rising gas prices and the dearth of jobs are negatively impacting consumer confidence and bringing the first hint of inflation in a long time. The Consumer Price Index (CPI) showed an increase of 0.5 percent in December, primarily a result of skyrocketing gas costs, according to the Department of Labor. The AAA reports that the average price of a gallon of gas has soared to $3.10 nationally, the highest since October of 2008. According to a Thomson Reuters/University of Michigan study, the preliminary index of consumer sentiment for January fell to 72.7, the lowest reading since November. The number had risen to 74.5 in December and was expected to rise to 75.5 for January, according to Bloomberg News.
Quicker job growth likely will be required to accelerate improved consumer spending, even as Americans are experiencing sticker shock every time they buy gas. Unfortunately, hiring has been anemic at best, spurring Federal Reserve policymakers to expand their efforts to jump start the economy. The lack of optimism “reflects a frustration with the lack of labor market progress,” said David Semmens, an economist with Standard Chartered Bank. “Until employers start hiring aggressively enough to bring down unemployment, improvements in consumer sentiment will be slow.” According to the Federal Reserve, industrial production rose in December, advanced by gains in business equipment and home electronics. Factory, mine and utility output also rose 0.8 percent during the same timeframe, the most significant increase in five months.
Other data from the Department of Commerce showed a 6.7 percent increase in retail sales in December of 2010, the largest jump since the same month of 1999. The big winner in the retail arena was tony Tiffany & Co., which reported that November-December sales rose by an impressive 11 percent.
Tags: AAA, Ben Bernanke, Big-ticket items, Bloomberg News, Christmas, consumer price index, Department of Commerce, Department of Labor, Federal Reserve, Gas prices, jobs, MasterCard Advisors’ SpendingPulses, recession, Standard & Poor’s 500 Index, Standard Chartered Bank, Thomson Reuters/University of Michigan preliminary index of consumer sentiment, Tiffany & Co., Treasury securities, U.S. consumers
Posted in Economics, General | No Comments »
Thursday, January 27th, 2011
At the instruction of Congress, the Federal Reserve has released the names of the approximately 21,000 recipients of $3.3 trillion in aid provided during the financial meltdown –without doubt the nation’s worst economic crisis since the Great Depression. Not surprisingly, two of the top beneficiaries were Bank of America and Wells Fargo, who received approximately $45 billion each from the Term Auction Facility. American units of the Swiss bank UBS, the French bank Societe Generale and German bank Dresdner Bank AG also received financial assistance. The Fed posted the information on its website in compliance with a provision of the Dodd-Frank bill that imposed strict new financial regulations on Wall Street.
One of the biggest surprises on the list is the fact that General Electric accessed a Fed program no fewer than 12 times for a total of $16 billion. Although the Fed originally objected, Congress demanded accountability because there was evidence that the central bank had gone beyond their usual role of supporting banks. In addition, the Fed purchased short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in housing debt.
Reactions to the revelations are both positive and negative. On the positive side, Richmond Fed President Jeffrey Lacker said “We owe an accounting to the American people of who we have lent money to. It is a good step toward broader transparency.” Sarah Binder, a senior fellow with the Brookings Institution, disagrees, noting that “These disclosures come at a politically opportune time for the Fed. Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”
Senator Bernard Sanders (I-VT) said “We see this (list) not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government. Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them.”
Tags: AIG, Bank of America, Bear Stearns, Ben Bernanke, Bloomberg News, Brookings Institution, congress, Dodd-Frank bill, Dresdner Bank AG, Federal Reserve, Federal Reserve Bank of Richmond, financial crisis, General Electric, Goldman Sachs, Great Depression, Lehman Brothers, Senator Bernard Sanders, Societe Generale, Term Asset-Backed Securities Loan Facility, Term Auction Facility, UBS, Wall Street, Wells Fargo
Posted in Economics, Financing, General | No Comments »
Wednesday, December 22nd, 2010
With the U.S. unemployment rate rising to 9.8 percent in November, the Department of Labor is concerned that economic recovery isn’t progressing as quickly as it would prefer. For the 19th consecutive month, unemployment has stayed above nine percent — the longest streak on record, beating out previous highs in the 1980s. Despite optimistic predictions that the nation would add 150,000 jobs in November, just 39,000 new jobs were added during the month, bringing unemployment up from 9.6 percent to 9.8 percent.
The Federal Reserve has decided to stay the course, saying the “economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.” Worries about steady high unemployment were the main motivation behind the Fed’s decision to launch a second round of economic stimulus in November with a new bond-buying program. Progress on reducing unemployment has been “disappointingly slow,” according to the Fed.
The persistent level of high unemployment shows that many Americans are still suffering, even though the National Bureau of Economic Research says the recession officially ended in June 2009. The economy lost more than eight million jobs during the recession. “To anyone around the dinner table, it means little,” says Lawrence Mishel, president of the liberal Economic Policy Institute. “The fact is, unemployment is going to remain flat for a year.”
“With the jobless rate stuck at 9.8 percent, the economy needs all the help it can get,” said Sung Won Sohn, economist at California State University. Because nearly 40 percent of the unemployed have been jobless for more than six months, there is growing fear that the cause may be more profound than the deepest recession in more than 70 years.
Tags: Austan Goolsbee, Ben Bernanke, Bush-era tax cuts, California State University, congress, deficit, Department of Labor, Economic Policy Institute, economic stimulus, Eric Cantor, Federal Reserve, house of representatives, Incomes, National Bureau of Economic Research, President Barack Obama, recession, unemployment rate
Posted in Economics, General | No Comments »
Wednesday, November 24th, 2010
The Federal Reserve – in a highly unusual action – is defending its recent purchase of Treasury bonds in an effort to get the U.S. economy moving. Critics of the decision to purchase additional assets, led by former Fed chairman Alan Greenspan, conservative economists and writers, representatives of foreign governments – not to mention Sarah Palin — say that the Fed is deliberately weakening the dollar to make American exports more competitive. Other arguments are that the Treasury bond purchases could eventually cause inflation and that the action won’t stimulate economic growth.
William Dudley, President of the Federal Reserve Bank of New York, countered that the objective is not to weaken the dollar or cause inflation. In fact, he believes that the Fed’s moves are already having a positive impact. “You’ve seen a significant easing of financial conditions,” according to Dudley. “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.” Fed Vice Chairman, Janet Yellen, agrees, telling the Wall Street Journal that action was necessary to spur the economy. If there is no monetary stimulus, Yellen says “I’m having a hard time seeing where really robust growth can come from.”
Dudley’s and Yellen’s comments seem to confirm that the Fed is no longer staying out of public debate over its policies. Although the Fed has typically remained above the fray to maintain its appearance of political independence, that stance has proved untenable in the face of the turmoil that resulted from the financial crisis. As a result, the Fed is now open to criticism from small-government conservatives and liberals who don’t trust Wall Street. Unfortunately for the Fed, Congressman Ron Paul (R-TX) — who based his 2008 presidential bid on his opposition to monetary policy – will soon chair the committee that oversees the Fed and plans to use the post as a “mini bully pulpit,” he said.
Tags: Alan Greenspan, Ben Bernanke, Federal Reserve, financial crisis, US treasury bonds, Wall Street
Posted in Economics, Financing, General | No Comments »
Wednesday, November 3rd, 2010
The Federal Reserve is considering new action to simultaneously stimulate the economy and prevent the possibility of deflation. Charles Evans, President of the Chicago Fed, recently said that the central bank needs to act to prevent the inflation rate from falling, saying the U.S. economy faces a “bona fide liquidity trap” and that additional accommodation is not even a “close call.” Boston Fed President Eric Rosengren, agrees, noting “insuring against the risk of deflation may be cheaper than” attempting to deal with it once it becomes a reality.
Fed Chairman Ben Bernanke is working with the Federal Open Market Committee (FOMC) to devise a strategy to purchase additional assets aimed at averting deflation and cutting the nine percent unemployment rate, noting that there is a “case for further action.” Evans supports a “reasonable period of time” as long as it is communicated “regularly and often” to the public. This type of policy would complement large asset purchases and represent a change to the FOMC statement that they will keep interest rates close to zero for “an extended period.”
“The central banks of the world, including ours, have been on an inflation targeting regime and moving to a brand new regime like that is quite difficult to blame,” said Alan Blinder, formerly a Fed Vice Chairman and currently a Princeton economist. The action poses “the danger of undermining credibility.” Other Fed officials are worried that the expectation of lower inflation will become a self-fulfilling prophesy. That might impede demand by increasing the cost of borrowing money.
Tags: Ben Bernanke, Charles Evans, Chicago, deflation, Fed, Federal Open Market Committee, Federal Reserve, stimulus
Posted in Economics, Financing | No Comments »
Tuesday, September 28th, 2010
Global banking regulators have agreed to implement new rules that will make the international banking industry safer and avoid future financial meltdowns. Known as Basel III — after the Swiss city in which the agreement was worked out — the new requirements will more than triple the amount of capital that banks must have in reserves. This will oblige banks to be more conservative and compel them to maintain larger hedges against potential losses.
The heart of the agreement is a requirement that banks raise the amount of common equity they hold – perceived as the least risky form of capital – to seven percent of assets from just two percent. Banks are concerned that the tough new regulations will reduce profits, harm weaker institutions and increase the cost of borrowing money. To allay their concerns, regulators are giving the banks as long as 10 years to implement the toughest rules. Jean-Claude Trichet, president of the European Central Bank, said “The agreements reached today are a fundamental strengthening of global capital standards.” Representatives from 27 nations, who are members of the Basel Committee on Banking Supervision, participated. The committee’s recommendations are subject to approval in November by G-20 nations, including the United States. A deadline of January 1, 2013, was set to start phasing in the revised regulations.
Mary Frances Monroe, vice president for regulatory policy at the American Bankers Association – which represents the nation’s 8,000 banks – was happy with the results. “Banks understand the need for heightened prudential standards,” she said. The United States’ top banking regulators – the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – issued a statement saying the agreement “represents a significant step forward in reducing the incidence and severity of future financial crises.”
Tags: American Bankers Association, bank regulators, Ben Bernanke, Federal Deposit Insurance Company, Federal Reserve, financial meltdown, Financial Services Roundtable, financial system, Lehman Brothers, leverage
Posted in Economics, Financing, General | No Comments »