Tag Archives: Fed

ABC personal finance subcomponent

Posted on by

2008-04-09 ABC News Washington Post US Weekly Personal Finance Index

ABC personal finance subcomponent

Down but not out.

Weakness, but probably no recession as per Bernanke’s latest address before Congress.

Inflation ripping, as Fed staff raises it’s near term forecast.

The Fed ‘fights inflation’ with ‘slack’.

The Fed waiting for slack to be reduced before turning its attention to inflation is illogical at best.

Without the much anticipated further decline in home prices the Fed will find itself that much further ‘behind the inflation curve’.

The Fed needs the housing decline for its models to forecast inflation returning to comfort zones.

Share

Plosser the hawk

Posted on by

Plosser, Dissenting Fed Voter, Says Price Stability Is Priority

By John Brinsley
March 28 (Bloomberg) — Federal Reserve Bank of Philadelphia President Charles Plosser, who voted against this month’s interest-rate cut, said keeping inflation in check is the “most effective” way of ensuring economic growth and job creation.

“Price stability is not only a worthwhile objective in its own right,” Plosser said in the text of a speech at a conference in Cape Town today. “It is also the most effective way monetary policy can contribute to economic conditions that foster the Federal Reserve’s other two objectives: maximum employment and moderate long-term interest rates.”

Plosser said today that keeping prices steady has to be the primary obligation of the central bank in order to ensure the economy runs as efficiently as possible. Price stability helps an economy’s ability “to achieve its maximum potential growth rate,” he said.

This is the mainstream macro economic position. (Not mine!)

It also addresses the dual mandate in the only logical manner the mainstream theory can address:

Low and stable inflation is the necessary condition for optimal growth and employment.

And they have volumes of maths to back it up.

In an effort to fend off a U.S. recession, Fed Chairman Ben S. Bernanke and his colleagues have slashed the federal funds rate by 2 percentage points this year, the most aggressive easing in two decades, even as surging oil and food costs threaten to stoke inflation. Plosser and Dallas Fed President Richard Fisher opposed the March 18 decision to cut the Fed’s main lending rate by three-quarters of a percentage point to 2.25 percent.

“Stable prices also make it easier for households and businesses to make long-term plans and long-term commitments, since they will know what the long-term value of their money will be,” Plosser said. “Price stability helps a market economy allocate resources efficiently and operate at its peak level of productivity.”

The Fed has lowered its benchmark rate six times in as many months since the collapse of U.S. subprime mortgages started to infect markets around the world in August last year. The world’s biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to American mortgage markets.

“There seems to be a view that monetary policy is the solution to most, if not all, economic ills,” Plosser said. “Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives it cannot attain.”

Public misconceptions over what central banks can and cannot do have “risen considerably over the years.” Central banks must therefore effectively communicate their goals and limitations, Plosser said.

The mainstream position is that rather than add to demand to address near term weakness and risk elevating inflation expectations, the government should instead let the output gap (unemployment and excess capacity in general) rise and bring inflation down.

If it does add to demand in an attempt to keep the output gap low and inflation elevates, a much larger output gap will soon be required to reign in the accelerating inflation problem.

The dissenting votes reflect this mainstream view that appears to be playing out in the least desirable way.

Share

Changing dynamics for the Fed

Posted on by

Cutting 75 basis points rather than the expected 100 basis points gave the Fed positive near term reinforcement from market participants:

  • Dollar went up
  • Food/fuel/commodities went down
  • Stocks did ok, including housing companies
  • Credit did ok

But it’s going to look to the Fed a bit like taking medicine: initial small doses have the desired effect, then things settle back, and it takes ever larger doses to keep moving the needle.

So now crude/food is moving back up, the USD is moving back down, stocks are doing ok, exports are booming, and the fiscal package is about to kick in.

For the Fed to keep moving the needle away from inflation it’s going to keep needing to not give markets all they are anticipating.

So with a 25 cut anticipated, they will realize they need to do no cut for a positive inflation response, and with no cut anticipated they need to hike, etc.

Credit markets will quickly get ahead of this and begin anticipating hikes.

The irony is higher rates will help support demand via the interest income channel.

And higher rates will support price increases via the cost channel.

Demand is being supported by increasing net fed spending and rising exports due to the reduced desires of non-residents to accumulate USD financial assets.

They no longer want to accumulate a net $60 billion a month of US financial assets (negative trade gap) due to the big 4 screaming fire in a crowded theater of previously content patrons:

  1. Paulsen calling CBs that buy USD currency manipulators
  2. Bush making it politically impossible for Muslim nations to further accumulate USD reserves
  3. Bernanke giving inflation a back seat to ‘market functioning’ via deep rate cuts into a triple supply shock
  4. Pension funds diversifying to passive commodity and non US equity strategies
Share

FOMC

Posted on by

Karim Basta:

  1. Further cut to gwth outlook
  2. Financial conditions tighter and housing getting worse
  3. Inflation receives greater concern than prior statement
  4. Conclusion: downside risks predominant and ‘timely’ means another intermeeting cut on the table.

Agreed, further comments below:

Release Date: March 18, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Could have been 100 as anticipated by the markets. Fed shaded its cut to the low side of the priced in expectations.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed

Implies there is still some growth, not negative yet.

and labor markets have softened.

Looking unrevised February payroll number, not the lower unemployment rate. In January they looked at the higher unemployment rate. Unemployment has subsequently gone from 5.0% to 4.9% to 4.8% (rounded).

Financial markets remain under considerable stress,

They went a long way to relieve stress over the weekend.

and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Housing starts were revised up, and other indicators indicate it may have bottomed.

Inflation has been elevated, and some indicators of inflation expectations have risen.

This was noted in several Fed intermeeting speeches.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.

They continue to make this projection even after being completely wrong for many meetings.

Still, uncertainty about the inflation outlook has increased.

That’s why – their forecasts have proven unreliable, and crude/food continues to rise as the USD continues to fall.

It will be necessary to continue to monitor inflation developments carefully.

Only ‘monitor’? No action planned.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Intermeeting action is on the table, for both growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

Wonder how much less aggressive?

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Share

Re: Bear Stearns Cont’d

Posted on by

(some email q&a’s)

UPDATED as more questions come in!!

Why would shareholders approve this sale?

Answer, they may not. They may take their chances with getting more $ in bankruptcy.

Or a higher bid might surface.

The Fed has turned Bear Stearns into a ‘free call’ with their non recourse financing,

And the Fed has moved spreads of agency and AAA paper back towards ‘fair value’ with their openended funding lines. This removes ‘liquidity risk’ and allows the securities to return to being priced on ‘default risk.’

This has dramatically increased the business value of Bear Stearns.

The large shareholders can now say no to the sale, maybe add a bit of capital or take on a ‘business partner,’ and outbid JPM for the remaining shares (if needed).
Might even start a bidding war.

There could still be well over $60 per share of value for the winner.

And there’s a reasonable amount of time for them to put something together.

And maybe this was Bear’s plan all along.

They knew they needed Fed funding to maximize shareholder value, and the JPM involvement to stabilize their client base and buy the time to find a real bid.

(CNBC now showing a chart showing $7.7 billion in breakup value.)

Seth writes:

For 2 a share is Chase getting a boat load of non prime paper that over time is worth a lot more than 2?

From what I’m hearing it’s already worth maybe 75 or more.

And the Fed gave jpm a free call.

The $2 is the least that it’s worth, as the fed is providing non recourse funding for the assets at prices that support the $2 price.

And at the same time the Fed took action to restore pricing of agency and aaa assets to more accurately reflect their actual default risk, which is near 0.

This is different.In this case the moral hazard is in not funding the primary dealers.It’s too easy for the predators (other dealers, hedge funds, etc.) to first get short the stock and then start a run on any broker that has to have any non tsy inventory financed and drive them out of business.

By funding the primary dealers who are in good standing (they report their finances to the fed) and regulating capital requirements and haircuts predators are kept at bay and shareholders continue to assume the business risk of the primary dealers.

Steve writes:

And the Fed has said in times of crisis they will not punish the many for the few.

Moral hazard is not a fixed doctrine. It requires flexibility and in times of crisis they accept that their action (the Fed’s) will not address the doctrine. On balance it is a price (overlooking moral hazard) they must pay for the greater good.

They have done it in the past so doing it again reflects a degree of consistency not a change in policy.

Paul writes:

How do you respond to the moral hazard argument of the Fed bailing out Bear Stearns?

I’ll let the word ‘bailout’ go for now, and begin by saying the liability side of banking is not the place for market discipline, and it’s also probably not the place for market discipline for the Fed’s appointed (anointed?) ‘primary dealers.’

(I will also not here question the idea of having primary dealers in the first place, but don’t take that mean i approve of that setup, thanks!)

So given the Fed wants primary dealers, it then follows there are specific securities they go along with this assigned role.

Presumably those would include the likes of tsy secs, maybe agency paper, maybe AAA rated mtg backed securities, etc.

Presumably also are functions the Fed wants its primary dealers to perform, like being market makers, providing some notion of liquidity, etc. etc.

And, presumably, the Fed has some notion of public purpose behind this entire creation.

So, given all that, to support this ‘institution of public purpose,’ it behooves the Fed to ensure the primary dealers themselves have the available lines of credit to perform this vital public function (almost hurts to write that…).

The bank primary dealers do have ‘guaranteed liquidity’ and so are safely able to function as primary dealers, knowing they can always finance their inventory positions. This can be done via raising fed ensured bank deposits, and borrowing from the fed by using their inventory as collateral, etc.

The non banks were at a disadvantage to the banks in that they relied on the banks to fund their inventories.

Bear Stearns got shut down when the banks said ‘no’ for non credit related reasons. Bear had perfectly good collateral that they held as part of their primary dealer function (as defined by the govt regulations), and the banks said no, perhaps because they had their own internal issues.

The same would happen to the banks, and the entire economy, if the Fed simply said no to the banking system and one morning and didn’t open the payments system.

It’s just one of countless flaws in the institutional structure that doesn’t get noticed until it’s a problem, no matter how many times I’ve pointed it out to ‘authorities.’

So to your question, while I do see a lot of other moral hazard issues, I don’t see this as one of them.

The Fed simply told JPM to deal with Bear in the normal course of business and lend vs qualifying collateral as has always been the case, and as is the case when the Fed lends to JPM.

Let me know if I’m missing something, thanks!

Share

Mar 15 update

Posted on by

The question for the Fed: Will further rate cuts help or hurt the credit crisis?

The Fed has been cutting to support the financial sector, and address risks (as they see them) of financial sector issues spilling over to the real sector.

How does the Fed see rate cuts helping the financial sector?

Lower payments for borrowers assist in servicing/refinancing outstanding debt and facilitate continued ‘borrowing to spend.’

However, in this cycle, it seems that rate cuts have been instrumental in the USD decline that correlates with rising gasoline/food/import prices.

‘Well anchored’ wages mean consumers are spending more on food/energy and have less for other goods and services.

And less for debt service, as evidenced by rising delinquencies and the (still mainly subprime, but starting to spread) deteriorating credit quality of consumer loan portfolios.

Yes, exports are increasing dramatically, supporting GDP, keeping the output gap reasonably low, but not increasing income for debt service where that is needed.

So the question for the Fed is, on balance, will further rate cuts help or hurt the credit crisis?

Will further cuts ‘ease financial conditions’ via interest rate channels?

Or will further cuts ‘tighten financial conditions’ via the current fx/inflation/debt service income channel?

And, even if those potential outcomes for the credit crisis are approximately equal, does the nod go to not cutting for reasons of residual inflation issues?

So far, not a single ‘real economy’ company has had problems beyond a slowdown in earnings and concern over future earnings. And slowdowns in sales have all been related to consumers being hurt by higher food and energy prices.

This implies the falling dollar/higher import prices is what has hurt the companies that have been subject to consumer weakness.

This implies Fed policy designed to protect the real economy from from potential spillover from the financial sector crisis has, as a side effect, done direct damage to the real economy.

And, of course, this is only relevant for the Fed if it comes up for discussion at the meeting on Tuesday.

Close friends tell me it probably won’t.

Share

Business Wire: JPMorgan Chase and NY Fed

Posted on by

Similar to the beginning of the end of the 1998 crisis when D bank bot Banker’s Trust when BT couldn’t fund itself, and then D bank funded Lehman and other dealers in a similar position to where Bear was yesterday.

Back then it happened after a three 25bp fed rate cuts. This time it happened after a total of 225 in cuts.

Today, JPMorgan Chase & Co. (NYSE: JPM) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.

JPMorgan Chase and Federal Reserve Bank of New York To Provide Financing To Bear Stearns

Today, JPMorgan Chase & Co. (NYSE: JPM) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.

Share

Dow Jones: No mof intervention

Posted on by

The MOF would have bought USD long ago if Paulson hadn’t gone around branding any CB a ‘currency manipulator’ and an international outlaw.

The USD is in freefall and is now the major source of inflation.

And maybe the Fed as seen the connection?

MOF Frets Over Yen, But No Hint Of Intervention

by Takeshi Takeuchi

(Dow Jones) Japanese currency authorities expressed alarm about the dollar’s fall close to the Y100-mark for the first time since 1995 but didn’t offer any clues about whether or when they might take any countermeasures.

Finance Minister Fukushiro Nukaga and his vice minister on currency affairs, Naoyuki Shinohara, separately voiced caution after the dollar fell to Y100.19 in the mid-day Tokyo session.

Nukaga said it is “a shared perception among the G7 (Group of Seven industrialized countries) that excessive exchange rate moves are undesirable,” while Shinohara also noted “excessive foreign exchange moves are undesirable.”

The two point men for Japan’s currency policy also said they will “continue closely watching foreign exchange markets,” a code phrase that shows their displeasure about current dollar/yen moves.

Neither of them, however, commented on whether they are considering taking countermeasures against the dollar’s rapid fall against the yen.

But Shinohara repeated the word “excessive” a few times in exchanges with reporters, suggesting the ministry’s level of caution has been at least raised in response to the imminent possibility of the dollar’s break below the Y100-mark.

In the past, finance ministry officials usually stepped up their currency rhetoric in stages before intervening. Their remarks on yen strength often changed from “rapid” to “a bit sharp” to “brutal,” while they also threatened “appropriate action” as an advance warning before intervening.

Share