Category Archives: Fed

Fed senior loan officer survey charts

Posted on by


[Skip to the end]

On Mon, Aug 11, 2008 at 1:25 PM, Karim writes:

  • Both lending standards and spds move up from cycle highs; appears defining aspect of the current episode may be the duration of tighter lending conditions (prior episodes approached current levels of tightness but were relatively short-lived).
  • Also of concern to Fed is chart on page 3 showing significant tightening of standards for prime residential mortgage loans (though all types of loans showed a deterioration)

http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200808/charts.pdf

Yes, and note how housing showing strong signs of bottoming and GDP moving up at the same time.

Interesting to watch the blood flowing around the clot, as it necessarily does.

Though not without difficulty.


[top]

Share

Bloomberg: Fed can’t reduce LIBOR

Posted on by

I could fix this in twenty minutes…

Money Market `Plagued’ by Libor That Fed Can’t Reduce

by Gavin Finch

(Bloomberg) A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December.

Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending have had limited success.

Share

Fed Governor Mishkin on monetary policy

Posted on by


[Skip to the end]

In case there was any doubt things have changed.

from his July 28 speech:

Policymakers, academic economists, and the general public broadly agree that maintaining a low and stable inflation rate significantly benefits the economy. For example, low and predictable inflation simplifies the savings and retirement planning of households, facilitates firms’ production and investment decisions, and minimizes distortions that arise because the tax system is not completely indexed to inflation. Moreover, I interpret the available economic theory and empirical evidence as indicating that a long-run average inflation rate of about 2 percent, or perhaps a bit lower, is low enough to facilitate the everyday decisions of households and businesses while also alleviating the risk of debt deflation and other pitfalls of excessively low inflation.

The rationale for promoting maximum sustainable employment is also fairly obvious: Recessions weaken household income and business production, and unemployment hurts workers and their families.

No mention of lost real output. Must have been an oversight.

As I have outlined elsewhere, these two objectives are typically complementary and mutually reinforcing: that is, done properly, stabilizing inflation contributes to stabilizing economic activity around its sustainable level, and vice versa.

Hence the dual mandate is met by sustaining low and stable inflation rates.

Nevertheless, it’s important to note a fundamental difference between the objectives of price stability and maximum sustainable employment. On the one hand, the long-run average rate of inflation is solely determined by the actions of the Federal Reserve.

And they do believe that. They believe it’s all a function of the interest rates they select.

On the other hand, the level of maximum sustainable employment is not something that can be chosen by the Federal Reserve, because no central bank can control the level of real economic activity or employment over the longer run.

And they are not responsible for the level of economic activity, only the rate of inflation.

In fact, any attempt to use stimulative monetary policy to maintain employment above its long-run sustainable level would inevitably lead to an upward spiral of inflation with severe adverse consequences for household income and employment.


[top]

Share

Re: Fed study on TAF

Posted on by


[Skip to the end]

>    
>    On Tue, Jul 29, 2008 at 4:05 AM, Andrea wrote:
>    
>    In case you haven’t seen this yet: A Fed study that finds that
>    Taf has lowered Libor.
>    
>    http://www.newyorkfed.org/research/staff_reports/sr335.html
>    
>    

right, thanks, as if they needed to fund a study to figure that out!

It’s like doing a study that shows the repo rate goes down when the fed lowers its ‘stop’ on repo.

(Too bad they didn’t use this study to show they should set a rate for the TAF and let quantity float, instead of setting a quantity and having an auction.)

It’s this kind of expense that gives govt. a govt. spending negative connotation.

all the best!

warren


[top]

Share

Reinhart got it right

Posted on by


[Skip to the end]

I hadn’t noticed this back then, but Vince got it right: The Fed purchased the $30 billion of securities from JPM/Bear Stearns, with JPM agreeing that if there were any net losses it would be responsible for the first $1 billion.

It’s very odd that the Fed would call this a non-recourse loan, as they cut a better deal than that.

Unlike a non-recourse loan, if the securities turn out to be profitable, the Fed gets those funds.

So why would the Fed use language that implies the transaction was worse for the Fed than it actually was?

Perhaps there was a legal or some other restriction that prevented the Fed from purchasing the securities?

Seem there is a lot more to the story than has been revealed?

Press Release
Summary of Terms and Conditions Regarding the JPMorgan Chase Facility


March 24, 2008

The Federal Reserve Bank of New York (“New York Fed”) has agreed to lend $29 billion in connection with the acquisition of The Bear Stearns Companies Inc. by JPMorgan Chase & Co.

The loan will be against a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as marked to market by Bear Stearns on March 14, 2008.

JPMorgan Chase has agreed to provide $1 billion in funding in the form of a note that will be subordinated to the Federal Reserve note. The JPMorgan Chase note will be the first to absorb losses, if any, on the liquidation of the portfolio of assets.

The New York Fed loan and the JPMorgan Chase subordinated note will be made to a Delaware limited liability company (“LLC”) established for the purpose of holding the Bear Stearns assets. Using a single entity (the LLC) will ease administration of the portfolio and will remove constraints on the money manager that might arise from retaining the assets on the books of Bear Stearns.

The loan from the New York Fed and the subordinated note from JPMorgan Chase will each be for a term of 10 years, renewable by the New York Fed.

The rate due on the loan from the New York Fed is the primary credit rate, which currently is 2.5 percent and fluctuates with the discount rate. The rate on the subordinated note from JPMorgan Chase is the primary credit rate plus 450* basis points (currently, a total of 7 percent).

BlackRock Financial Management Inc. has been retained by the New York Fed to manage and liquidate the assets.

The Federal Reserve loan is being provided under the authority granted by section 13(3) of the Federal Reserve Act. The Board authorized the New York Fed to enter into this loan and made the findings required by section 13(3) at a meeting on Sunday, March 16, 2008.

Repayment of the loans will begin on the second anniversary of the loan, unless the Reserve Bank determines to begin payments earlier. Payments from the liquidation of the assets in the LLC will be made in the following order (each category must be fully paid before proceeding to the next lower category):

  • to pay the necessary operating expenses of the LLC incurred in managing and liquidating the assets as of the repayment date;
  • to repay the entire $29 billion principal due to the New York Fed;
  • to pay all interest due to the New York Fed on its loan;
  • to repay the entire $1 billion subordinated note due to JPMorgan Chase;
  • to pay all interest due to JPMorgan Chase on its subordinated note;
  • to pay any other non-operating expenses of the LLC, if any.

Any remaining funds resulting from the liquidation of the assets will be paid to the New York Fed.

Where No Fed Has Gone Before

Why the Federal Reserve’s ‘loan’ for the Bear Stearns deal looks like an investment—and faces serious scrutiny


March 26, 2008

by Peter Coy

The Federal Reserve has stretched its mandate up, down, and sideways to prevent a financial market deluge. Now it appears to be stretching the English language a bit as well. What the Fed is calling a $29 billion “loan” to help finance JPMorgan Chase’s (JPM) purchase of Bear Stearns (BSC) looks much more like a $29 billion investment in securities owned by Bear. Although the Fed insists that it isn’t technically buying any assets, in practical terms it’s doing exactly that. All this adds up to a big and unacknowledged step up in the central bank’s financial intervention with Wall Street investment banks.

The Fed, of course, is the only part of government with the speed, power, and flexibility to arrest a bout of market panic. By rapidly intervening in mid-March to keep Bear from filing for bankruptcy, it may well have prevented a series of cascading failures that could have severely damaged the financial system and the economy. Many economists and analysts are happy that the Fed stepped into the breach. Nevertheless, now that things have quieted down a bit, the Fed is likely to face some tough questions about the precise nature of its actions as well as the legal justification for them.

The second-guessing has already begun. On Mar. 26, Senate Banking, Housing, and Urban Affairs Chairman Christopher Dodd (D-Conn.) announced an Apr. 3 hearing to explore the “unprecedented arrangement” between the Fed, JPMorgan, and Bear. Top officials from the Fed and other regulators, as well as Bear Stearns CEO Alan Schwartz and JPMorgan CEO Jamie Dimon, will likely be grilled about the details.

“That Looks Like Equity”
Meanwhile, Treasury Secretary Henry Paulson gave the Fed a gentle prod on Mar. 26 in a speech to the Chamber of Commerce. While saying he fully supported the Fed’s recent actions, Paulson stressed that “the process for obtaining funds by nonbanks must continue to be as transparent as possible.” He also urged the Fed to continue to work with other agencies to get the information necessary for “making informed lending decisions.”

So far, few people have focused on what exactly the Fed is getting in exchange for supplying $29 billion to JPMorgan Chase. That’s a bit surprising because whatever the deal is, it’s far from a standard loan. The strangest twist is that even though the money goes to JPMorgan, that firm isn’t the borrower. So the Fed can’t demand repayment from JPMorgan if the Bear assets turn out to be worth less than promised.

What’s also odd is that if there’s money left after loans are paid off, the Fed gets to keep the residual value for itself. That’s what one would expect if the Fed were buying the assets, not just treating them as collateral for a loan. Vincent R. Reinhart, a former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute, said in an interview on Mar. 26: “The New York Fed is the residual claimant. That doesn’t look to me like a loan. That looks like equity.”


[top]

Share

Fed Paper: “The Effect of the Term Auction Facility on the London Inter-Bank Offered Rate”

Posted on by


[Skip to the end]

Hardly need a study to figure that out!

This paper from the NY Fed was just released:

The Effect of the Term Auction Facility on the London Inter-Bank Offered Rate

Summary: This paper examines the effects of the Federal Reserve’s Term Auction

Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association would provide one indication of the efficacy of the TAF in mitigating liquidity problems in the interbank funding market. The empirical results suggest that the TAF has helped to ease strains in this market.


[top]

Share

Bloomberg: Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

Posted on by


[Skip to the end]

A minority view but a growing one.

They are thinking the low rates are destabilizing the housing and financial markets via the weak USD channel.

Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

by Vivien Lou Chen
(Bloomberg) Federal Reserve Bank of Minneapolis President Gary Stern said the central bank shouldn’t wait for financial and housing markets to stabilize before raising interest rates.

“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course” and begin raising rates, Stern said in an interview in Minneapolis today. “Our actions will affect the economy in the future, not at the moment. Forecasts play a critical role.”

The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, may reinforce traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

“We’re pretty well-positioned for the downside risks we might encounter from here,” said Stern, 63, the Fed’s longest-serving policy maker. “I worry a little bit more about the prospects for inflation.”

The bank president compared the current credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That’s a more sanguine assessment than others have. The International Monetary Fund has said it’s the worst since the Great Depression and former Fed Chairman Alan Greenspan said it’s the most intense in more than half a century.

17-Year High
Stern spoke two days after government figures showed consumer prices surged 5 percent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 percent, higher than the 2.1 percent average over the last five years.

“Headline inflation is clearly too high,” Stern said. He added that he’s concerned that will feed through to core prices and public expectations for inflation.

As long as energy and food costs level off, core inflation ought to slow over the next year, Stern said.

Crude oil has surged 73 percent in the past 12 months, and rose to a record of $147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the United Nations Food and Agriculture Organization.

Stern declined to say when policy makers may shift toward raising rates. The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 percent, from 5.25 percent last September.

Rate Outlook
Traders estimate 58 percent odds that the Fed will boost its main rate at least a quarter point from 2 percent in October, after keeping borrowing costs unchanged in August and September. There’s a 73 percent probability of a move by year-end, futures prices show.

Minutes of the Fed’s June 24-25 gathering, released July 15, showed that some Fed officials favored an increase in rates “very soon.” Fed Chairman Ben S. Bernanke this week said there are risks to both inflation and growth, abandoning the FOMC’s June assessment that the threat of a “substantial” downturn had receded.

“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.

The Fed on July 13 offered Fannie Mae and Freddie Mac access to direct loans from the central bank in case the firms needed the financing before Congress acts on Paulson’s rescue plan. The Treasury chief is seeking power to make unlimited loans to and purchase equity in the companies if needed.

Stern said the proposals are “clearly designed to bolster Fannie and Freddie.”

Stern is the only FOMC member who’s served with three chairmen: Paul Volcker, Greenspan and Bernanke. He became the bank’s president in 1985.


[top]

Share

Bernanke testimony on inflation

Posted on by


[Skip to the end]

The last few Michigan surveys had one-year inflation expectations over 5%.

This is not lost on an FOMC that believes inflation expectations cause inflation.

Chairman Bernanke said this yesterday after outlining the inflation expectations/inflation process:

“A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

‘Prevent’ implies action, not ‘monitoring’.

Might just be a poor choice of words.


[top]

Share