Posts Tagged ‘interest rates’
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
Posted in Economics, General | No Comments »
Tuesday, August 30th, 2011
Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession. This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago, Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.
According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes. Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors. The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.
From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around. At present, he says the issue isn’t so much one of supply but demand. A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards. The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.
The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs. Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy. A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions. Another was the unanticipated spike in oil prices that dampened consumer spending.
The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy. The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.
One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.
In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions. The market’s comeback depends on job growth. According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York. Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt. The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.
To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.
Rick Mattoon on the Economy: On the Brink or On the Mend?:
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Tags: big-box retailers, Borders, Circuit City, Credit downgrade, Dow Jones Industrial Average, Federal Reserve Bank of Chicago, financial crisis, interest rates, Japanese earthquake and tsunami, Kellogg School of Management, Northwestern University, oil prices, Quantitative easing, recession, Rick Mattoon, Standard & Poor’s, Supply-chain disruptions, treasury bills, unemployment rate
Posted in Economics, General | No Comments »
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 »
Wednesday, March 2nd, 2011
Canada avoided the collapse in housing prices that devastated American homeowners and the U.S. economy, thanks to tighter financial regulations, the lack of subprime lending and securitized mortgages. Foreclosures are rare. As a result, Canadian real estate steadily appreciated while property values in Florida, Arizona and other hard-hit American markets tanked.
According to James MacGee of the Federal Reserve Bank of Cleveland, The United States’ and Canada’s “Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust.
And what is that other factor? Canadians are a bit plodding: Perhaps the simplest story is that Canada was ‘lucky’ to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles.”
Relaxed lending standards in the United States, highlighted by the rise in subprime lending, played a vital role in creating the housing bubble. This weakening of standards led to an increase in housing demand. Mortgages were frequently given to people who were likely to have trouble making payments. Extending credit to risky borrowers helped fuel the housing boom and set the stage for the resulting surge in defaults and foreclosures, which were a big factor in the housing bust. Additionally, according to the Case-Shiller Index, house prices in the United States from 2000 through 2006 appreciated at a rate nearly double that of Canadian residential real estate. In contrast with the United States, Canadian house prices continued to appreciate until late 2008, and are now nearly 80 percent higher in value than in 2000.
MacGee said “The potential risks of increased household mortgage debt depend critically upon its distribution across borrowers. To see how the distribution of mortgage debt has changed, we examined the distribution of the ratio of the outstanding loan to house value (the LTV) of borrowers. A high LTV implies that a small decline in the house price would leave the owner with negative equity. Negative equity is problematic as it removes the option for a homeowner who is unable to meet their mortgage payments to sell their home to repay the mortgage.”
Canadian home prices are leveling off in 2011, though, with an overall decline of 0.9 percent anticipated for the year. A home worth $100,000 will likely decline by $900 in 2011. In some areas, home prices might actually increase while other areas might see prices fall two or three times as much. The Canadian Real Estate Association (CREA) expects a 7.3 percent decline in home sales in 2011.
“Canadians are debt-averse,” said Kevin Fritz, a Canadian who recently purchased a home and made a 40 percent downpayment. This is an attitude that is partly cultural and partly shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”
“It is a regulatory structure in Canada that created the Canadian mortgage system, and it was a regulatory and political structure in the U.S. that created the U.S. mortgage system,” said Ed Clark, chief executive of TD Bank. “The irony is…that one of the primal causes of the crisis was the U.S. mortgage system.”
In an interesting aside, more Canadians are finding housing bargains in Florida, and today account for eight percent of residential sales in the state. Doug Flood, who relocated to the Sunshine State from Toronto in 2008, now runs a business that helps his fellow Canadians find the home they want. “There’s clearly a perfect storm. If you’re Canadian, you’ve got very low interest rates at home if you want to borrow against your house. You’ve got a foreign exchange par, dollar-for-dollar. And prices down here that are 40 to 50 percent lower than what they were five years ago.”
To listen to our interview with the Brookings Institution about financial regulations, click here.
Tags: Arizona, Canada, Canadian Real Estate Association, Case Shiller Index, Doug Flood, Federal Reserve Bank of Cleveland, financial regulation, Florida, foreclosures, Foreign exchange par, Housing bubble, housing market, Housing prices, interest rates, James MacGee, Loan-to-value ratios, Off balance sheet vehicles, Securitized mortgages, subprime mortgages, TD Bank, United States
Posted in General, Residential | No Comments »
Tuesday, December 21st, 2010
The current ultra-low interest rates are hurting profit margins at banks that depend on the gap between what they charge borrowers and pay depositors to make money. Pension funds also are hurting, because they are under growing pressure to meet their retirees’ obligations. Meanwhile, some types of insurance are more costly as firms attempt to regain earnings that will continue shrinking until interest rates rise. Two years of low interest rates, coupled with the Fed’s plan to purchase as much as $900 billion of U.S. Treasury notes through the middle of 2011, have been a boon to borrowers such as companies, consumers, cities and states.
“It is clear that there are costs,” said Michael Cloherty, chief of U.S. interest-rate strategy at RBC Capital Markets. “The question is whether the good done by low interest rates is enough to justify forcing people and institutions to incur these costs.” Although many American banks have recovered from the subprime-mortgage meltdown and the Great Recession, others are finding that low interest rates are hurting their profitability.
Banks that say they have more than $1 billion in assets have seen their net interest margin (a performance metric that examines how successful a firm’s investment decisions are compared to its debt situations) fall to 3.74 percent as of September 30, compared with 3.85 percent in March, according to the Federal Deposit Insurance Company (FDIC). “We have probably seen the high-water mark for margins in the 3rd quarter,” said Mark Fitzgibbon, an analyst at Sandler O’Neill & Partners LP. “In the next several quarters, we will see it move lower.” Goldman Sachs Group’s Scott McDermott is advising clients – pension funds, endowments and sovereign wealth funds – that low interest rates are “going to be here for a while… Don’t assume that this environment will disappear next month or next year and things will go back to normal.”
Tags: 10-year Treasuries, 30-year mortgages, Federal Deposit Insurance Corporation, Federal Reserve, Great Recession, interest rates, Net interest margin, pension funds, Profit margins, RBC Capital Markets, Sovereign wealth funds, Subprime-mortgage meltdown
Posted in Economics, Financing, General | 1 Comment »
Wednesday, August 4th, 2010
As the nation gradually recovers from the Great Recession, several years are likely to pass before lending returns to pre-crisis levels, according to Federal Reserve Governor Elizabeth Duke. The return of credit growth is far slower than during any business cycle of the last four decades with the sole exception of the 1990 – 1991 recession. At that time, consumer credit required three years and commercial real estate nearly nine years to recover, Duke said in a recent speech.
Since December of 2008, the Fed has kept its target interest rate at zero to 0.25 percent in an effort to reduce the cost of borrowing and help the economy recover from the Great Recession. Even so, loans held by commercial banks slid by approximately five percent in 2009. “Just as the causes for the decline in lending are multifaceted and complex and took time to evolve, the solutions will likely be equally difficult and will take time to fully work,” Duke said. She is the sole former commercial banker to serve on the Fed’s Board of Governors. “We at the Federal Reserve, meanwhile, will continue to do everything we can to encourage a return to a healthy credit environment.”
According to data released by the Federal Reserve, consumer borrowing increased in April for the first time in three months. The Fed’s Open Market Committee notes that household spending is restrained by “high unemployment, modest income growth, lower housing wealth and tight credit.” Duke said that “Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while. Household net worth dropped about 25 percent during the crisis, about 20 percent of mortgage borrowers lack equity in their homes and consumers are quite burdened by debt payments.”
Tags: Ben Bernanke, Conference Board, Department of Commerce, Elizabeth Duke, Fed, Federal Reserve, George W. Bush, Great Recession, Gulf of Mexico, household spending, interest rates, lending, National Fedearaton of Independent Business, oil spill, unemployment
Posted in Economics, Financing | No Comments »
Thursday, March 4th, 2010
The last 30 years have seen a boom for skyscraper construction because the cost of borrowing money had declined significantly. When investors borrow money to purchase assets, they send prices higher. The problem is that this borrowing makes the markets susceptible to busts when investors sell assets to pay their debts. The recent financial crisis was one result of this process, with the debts larger and the price swings broader than has been seen in the past three decades. According to central bank critics, focusing on consumers – and not on the dangers of asset-price inflation – have encouraged bubbles by keeping interest rates artificially low.
The central bank critics argue that the desire to end the credit crunch may be causing authorities to make the same mistake by maintaining short-term interest rates at less than one percent in a majority of the developed world. Developing markets, thanks to their tendency to emulate richer nations, have the same cheap-money policies. The irony is that many of these economies are growing faster than those in the developed world.
For the commercial real estate industry, the bubble means that it is unlikely that we will see more high-profile skyscrapers like the Burj Dubai or Petronas Towers under construction very soon. All three projects were started during financial booms and delivered in hard economic times.
Listen to our interview with Rick Mattoon, a senior economist and economic advisor in the economic research department of the Federal Reserve Bank of Chicago, on the dangers of asset price inflation. Click here for the podcast.
Tags: Asset-price inflation, Ben Bernanke, Burj Dubai, central banks, Federal Reserve, financial markets, interest rates, investors, MSCI index, Petronas Towers, Skyscraper construction, Wall Street crash
Posted in Development, Economics, Financing, Office | 1 Comment »
Wednesday, February 17th, 2010
Federal Reserve Chairman Ben Bernanke is starting to look at ways to back off from the central bank’s heroic efforts to keep the nation’s economy afloat through the financial crisis of the past 18 months. The trick to raising short-term interest rates, which have been at historic lows for more than a year, is to time them with extraordinary precision to avoid new damage to the still-fragile economy.
At present, the Fed has $2.29 trillion on its balance sheets, an increase from the $934 billion reported in September, 2008, when the financial crisis was at its worst. Bernanke plans to sell some of the Fed’s mortgages, Treasuries and debt by offering reverse repurchasing agreements. Under these arrangements, the Fed sells its securities to a third party while agreeing to re-buy them at some point in the future.
The Fed’s next step is to sell banks and financial firms the equivalent of certificates of deposit. In these cases, the Fed gets a portion of the bank’s reserves in exchange for paying interest at a fixed rate. Called a “term deposit facility,” these deposits would be auctioned off and banks couldn’t count their investment in the Fed as cash or reserves.
“These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit,” Bernanke said in testimony at a Capitol Hill hearing. “As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.”
Tags: American Enterprise Institute, American International Group, Bear Stearns, Ben Bernanke, central bank, congress, department of treasury, exit strategy, Fannie Mae, Federal Reserve, financial crisis, Freddie Mac, Ginnie Mae, interest rates, JP Morgan Chase, University of Chicago
Posted in Economics, Financing | No Comments »
Thursday, January 21st, 2010
A Federal Reserve official predicts that 2010 will see a continuing moderate economic recovery with
interest rates kept “exceptionally low” to encourage job creation. Elizabeth Duke, a Fed governor, said “In the current environment, the Federal Open Market Committee (FOMC) continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Such policy accommodation is warranted to provide support for a return over time to more desirable levels of real activity and unemployment in the context of price stability.”
The Fed slashed interest rates to nearly zero in December 2008 in reaction to the worst recession in 70 years, and created other emergency lending facilities. Speaking to the Economic Forecast Forum in Raleigh, NC, Duke pointed out that recent data on production and spending indicate that economic activity increased at a “solid rate” during the 4th quarter of 2009.
Duke was quick to point out that credit remains tight for businesses; she believes that continued growth is dependent on additional progress in fixing financial markets and re-establishing the flow of credit to households and small businesses. The Fed will adjust policy if any changes occur in economic conditions. According to Duke, the Fed has “a wide range of tools for removing monetary policy accommodation when that becomes appropriate.”
Tags: commercial real estate, economic forecast, Elizabeth Duke, federal funds rate, Federal Open Market Committee, Federal Reserve, interest rates, price stability, unemployment
Posted in Economics, Financing | No Comments »
Wednesday, January 20th, 2010
Foreign banks, American private equity firms and a leading Chinese sovereign wealth fund have been investing in commercial real estate in the United States in the hope that interest rates stay low.
This increasing interest from investors could be a sign that the market is experiencing some stabilization. According to Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm, “We believe the real story is that capital is ready to buy, even though it may not be so visible today.” As one example, the state-owned China Investment Corporation has enlisted several investment firms to identify commercial real estate opportunities in the United States.
Another sign of incipient recovery is the fact that Colony Capital won a Federal Deposit Insurance Corporation (FDIC) auction for $1 billion worth of commercial property loans previously held by banks that had failed. The transaction valued the loans at 44 cents on the dollar and is structured so the FDIC put up $136 million owns 60 percent of the equity. Los Angeles-based Colony put up $90 million for a 40 percent share. Colony’s founder, Tom Barrack, said the investment is “an implicit bet that rates stay low.”
In another example, JPMorgan Chase raised $625 million for Inland Western, which put $500 million into CMBS. The deal was significant because it closed without assistance from the Term Asset-Backed Loan Facility (TALF).
Tags: Bank of China, China Investment Corporation, CMBS, Colony Capital, commercial real estate, Federal Deposit Insurance Company, Inland Western, interest rates, private-equity firms, recession, recovery, SL Green, Sovereign wealth funds, TALF
Posted in Development, Economics, Office | No Comments »