craig-torres

Fed Restarts Currency-Swap Tool With ECB in Effort to Contain Debt Crisis

by on May 9, 2010

By Scott Lanman and Craig Torres May 9 (Bloomberg) — The U.S. Federal Reserve said it will restart its emergency currency-swap tool by providing as many dollars as needed to central banks in Europe, the U.K. and Switzerland to help keep Europe’s sovereign-debt crisis from spreading to other markets. The swaps with the ECB, Bank of England and Swiss central bank will allow them to provide the “full allotment” of U.S. dollars as needed, the Fed said today in a statement in Washington. A separate swap line with the Bank of Canada will support as much as $30 billion, the Fed said. The swaps were authorized through January 2011. The Fed action came as European policy makers unveiled an unprecedented loan package worth almost $1 trillion to stop a crisis that threatened to shatter confidence in the euro. The Fed on Feb. 1 had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007. In a swap, central banks exchange foreign currency with an agreement to reverse the transaction at a later date. The central banks will then lend the dollars at fixed rates to firms in their countries. Dollar liquidity tightened in London last week amid concern financial institutions are holding too many assets of Europe’s most indebted nations. The London interbank offered rate, or Libor, for three- month loans climbed 5.5 basis points to 0.428 percent, the highest level since Aug. 17, according to data from the British Bankers’ Association. It was the biggest increase since Jan. 16, 2009, and the 13th straight gain. U.S. Pressure The Fed’s swaps come at a time of increasing political scrutiny. Congress could ask why the U.S. central bank is expanding the supply of dollars to help smooth disruptions caused by fiscal imbalances in Europe. Senator Bernard Sanders , a Vermont independent, wants the Government Accountability Office to look into Fed lending facilities during the crisis, including swap lines with foreign central banks, such as the $20 billion facility the Fed opened with the ECB in December 2007. A vote on the Sanders amendment could come as soon as May 11 as Congress proceeds on the most sweeping overhaul of financial regulations since the Great Depression. “Many members of Congress are deeply suspicious of the Fed’s interventionist instincts,” said Lou Crandall , chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Bailing out Wall Street caused enough resentment; appearing to bail out Greece would be even more problematic.” “The Fed cannot afford to rile up its congressional critics while the financial reform bill is still in play,” Crandall said before tonight’s announcement. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Restarts Currency-Swap Tool With ECB in Effort to Contain Debt Crisis

Fed Repeats Pledge to Maintain Low Rates, Sees Improvement in Labor Market

by on April 28, 2010

By Craig Torres April 28 (Bloomberg) — The Federal Reserve restated its intention to keep the benchmark interest rate near zero for an “extended period” and said the labor market is “beginning to improve.” “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Federal Open Market Committee said in a statement today in Washington. Chairman Ben S. Bernanke is contending with an economy that’s been growing for almost a year without an increase in inflation or a decline in unemployment below 9.7 percent. While consumer spending is recovering along with business investment, credit to households remains tight. A surge in corporate profits last quarter was led by demand from overseas and lower labor costs, according to results from Standard & Poor’s 500 companies that have reported earnings this month. “With substantial resource slack continuing to restrain cost pressures and longer term inflation expectations stable, inflation is likely to be subdued for some time,” the FOMC said. Treasury notes remained lower after the decision. Stocks and the dollar were little changed. Spending, Employment Officials also said growth in household spending has “picked up recently.” The job market is “beginning to improve,” according to the statement. Last month, the FOMC said the labor market “is stabilizing.” U.S. central bankers have kept the benchmark lending rate in a range of zero to 0.25 percent since December 2008. Their purchases of $1.25 trillion in mortgage-backed securities, which ended last month, boosted the balance sheet to a record $2.34 trillion, creating concern among some officials that aggressive monetary stimulus could lead to imbalances later. Kansas City Fed President Thomas Hoenig dissented for the third straight meeting. He said “that continuing to express the expectation of exceptionally low levels of the federal funds rates for an extended period was no longer warranted because it could lead to the buildup of future imbalances and increase risks to longer-run macroeconomic and financial stability” and limiting the ability to increase rates “modestly.” Gross domestic product grew at a 3.3 percent annual pace in the first quarter, according to the median forecast of economists surveyed by Bloomberg News ahead of an April 30 report from the Commerce Department. After a 5.6 percent expansion in the prior three months, such growth would mark the best back-to-back performance since the last six months of 2003. Markets Improve Conditions in financial markets have also improved. Raytheon Co., the world’s largest missile maker, and the finance unit of Royal Dutch Shell PLC led a drop in U.S. industrial company debt yields to 129 basis points more than similar- maturity Treasuries last week, according to Bank of America Merrill Lynch index data. The spread is one basis point tighter than it was on Aug. 9, 2007, when BNP Paribas SA halted withdrawals from three investment funds near the start of the credit crisis. Industrial company spreads widened 1 basis point yesterday to 130 basis points. A basis point is 0.01 percentage point. Economists have raised forecasts from earlier this month as reports showed consumer spending climbed, inventories rose and businesses invested in new equipment. The median estimate of analysts polled from April 1 to April 8 called for a 3 percent growth rate. Retail sales increased 1.6 percent last month, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department. Stocks of companies that rely on discretionary spending are up. Shares of Chipotle Mexican Grill Inc., a Denver-based Mexican restaurant chain, are up about 55 percent year-to-date. Shares of Starbucks Corp ., based in Seattle, have risen 14.5 percent. Jobless Rate For all the positive news, economists surveyed by Bloomberg News expect non-farm payrolls to rise by just 175,000 this month, not enough to lower the unemployment rate from 9.7 percent, where it stood in March. Slack in labor markets and resulting weak wage pressures have held down consumer prices. The consumer price index minus food and energy rose at a 1.1 percent pace for the 12 months ending March, down from 1.3 percent in February. “The Fed is going to be pretty cautious until we start seeing 300,000 gains in private monthly payrolls,” Julia Coronado , senior U.S. economist at BNP Paribas SA in New York, said before the announcement. “Without a stronger turn into job growth, and without credit creation, it doesn’t look like we would accelerate much from here.” Inflation Outlook Officials brought a fresh set of forecasts to today’s meeting. Their outlook for inflation and unemployment, which will be disclosed in three weeks when minutes are released, will offer insights into their estimates of how fast the economy will use up spare capacity. About 80 percent of S&P 500 companies to have posted first- quarter earnings have topped analysts’ projections, according to data compiled by Bloomberg. Some companies are positioning for a sustained increase in demand. Caterpillar Inc. , based in Peoria, Illinois and the world’s largest maker of construction equipment, posted its first earnings increase in seven quarters on April 26, exceeding analysts’ estimates. Eastman Chemical Co. , the biggest U.S. maker of plastics for water bottles, topped analysts’ estimates with first-quarter earnings and its second-quarter forecast. Jim Rogers , chief executive officer of the Kingsport, Tennessee-based company, said April 23 that its output will rise after first-quarter sales jumped 39 percent to $1.56 billion. Sales Forecast Macy’s Inc., the second-largest U.S. department-store chain, boosted its annual profit and sales forecasts yesterday. Sales at stores open at least a year will rise as much as 3.5 percent, Chief Financial Officer Karen Hoguet said at an analyst meeting in New York. The Cincinnati-based retailer earlier predicted a gain of 2 percent at most. “We are at the early stages of gaining confidence that the recovery is sustainable,” Alan Ruskin , global head of currency strategy at RBS Securities Inc., said before the announcement. “The virtuous cycle of generating jobs through consumption is just starting up, but demand is still vulnerable to a change in financial conditions, if for example the market’s attention shifts to disturbing U.S. fiscal accounts.” Bernanke expressed concerns yesterday about the long-term prospects for the economy, telling a White House commission on the budget deficit that budget deficits may eventually drive up interest rates . The failure to achieve a sustainable fiscal plan in the U.S. would “sap the nation’s economic vitality, reduce our living standards and greatly increase the risk of economic and financial instability,” he said. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Repeats Pledge to Maintain Low Rates, Sees Improvement in Labor Market

Bernanke Says U.S. Recovery to Stay Moderate Amid `Significant Restraints’

April 14, 2010

By Craig Torres April 14 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the U.S. expansion will remain moderate as the economy contends with weak construction spending and high unemployment. “On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters,” Bernanke said in testimony to Congress today. “Significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.” U.S. central bankers are debating how and when to pull back on record monetary stimulus as the economy recovers from the worst slump since the Great Depression. The Fed chairman’s remarks didn’t include a discussion of the path of interest rates , and his outlook doesn’t suggest officials are ready to alter their guidance that rates will remain low “for an extended period,” a phrase repeated in their March statement. The 56-year-old Fed chairman said “further economic expansion will depend on continued growth in private final demand,” now that inventories are better aligned with sales and as fiscal stimulus is set to taper off. “Consumer spending should be aided by a gradual pickup in jobs and earnings, the recovery in household wealth from recent lows, and some improvement in credit availability,” the 56- year-old Fed chairman said today in remarks prepared for testimony to the Joint Economic Committee of Congress. Even so, “a significant amount of time will be required to restore the 8-1/2 million jobs that were lost during the past two years.” Main Rate Policy makers have held the main lending rate at zero to 0.25 percent since December 2008. Fed officials next meet April 27-28. The economy is in its fourth consecutive quarter of expansion, according to economists surveyed by Bloomberg News. Fed officials in January forecast growth of 2.8 percent to 3.5 percent in 2010, about in line with the 3 percent consensus among economists surveyed by Blue Chip Economic Indicators. Sales at U.S. retailers climbed in March more than anticipated, signaling consumers will play a bigger role in a broadening economic recovery. Purchases increased 1.6 percent last month, the most in four months, a Commerce Department report showed today. Stocks rose on the retail sales figures and better-than- forecast corporate earnings. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,201.14 at 10:27 a.m. in New York. Manufacturing grew at the fastest pace in more than five years in March, and service industries expanded at the fastest pace since May 2006, according to indexes tracked by the Institute of Supply Management. Payrolls Grow Employers increased payrolls by 162,000 workers last month, the third gain in the last five months and the biggest since March 2007, signaling companies are becoming more confident the economy is healing, Labor Department figures showed April 2. The jobless rate was 9.7 percent in March for a third month. JPMorgan Chase & Co., the second-biggest U.S. bank by assets, beat analysts’ estimates as first-quarter earnings rose 55 percent on record fixed-income trading revenue and a reduction in provisions for credit losses. Net income climbed to $3.33 billion from $2.14 billion in the same period a year earlier, the New York-based bank said today in a statement. The Fed chairman noted that bank credit to households and businesses is still falling. “The decline in large part reflects sluggish loan demand and the fact that many potential borrowers no longer qualify for credit, both results of a weak economy,” Bernanke said. Consumer Prices The consumer price index slowed to a 1.1 percent annual rate in March versus 1.3 percent in February, Labor Department figures showed today. Other price indexes are also decelerating. The personal consumption expenditures price index, minus food and energy, slowed to a 1.3 percent annual rate in February from a 1.5 percent rate the prior month. Wal-Mart Stores Inc., the world’s largest retailer, has reduced prices on more than 10,000 items after sales at U.S. stores dropped last quarter. The company plans to cut more prices in the coming weeks and months, Linda Blakley , a company spokeswoman, said April 9. The Fed chairman noted the “subdued” rate of increase in consumer prices and said “moderation in inflation has been broadly based.” Bernanke reiterated his call for lawmakers to set a path of reducing the record federal budget deficit. “A credible plan for fiscal sustainability could yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence,” he said. “Addressing the country’s fiscal problems will require difficult choices, but postponing them will only make them more difficult.” Record Deficits The Obama administration estimates budget deficits will total $5.1 trillion over five years and hit a record $1.6 trillion in the year ending Sept. 30. The $1.4 trillion deficit in 2009 was equal to 9.9 percent of gross domestic product, the largest share since the end of the World War II. Households are borrowing less and paying down debt even as the government borrows more. Consumer credit in February fell $11.5 billion, the 12th drop in 13 months. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

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Bernanke’s Exit Strategy Will Give More Prominent Role to Fed Asset Sales

March 26, 2010

By Craig Torres and Scott Lanman March 26 (Bloomberg) — Federal Reserve officials are moving toward a consensus that asset sales will play a more prominent role in their exit from the most expansive monetary policy in the central bank’s history. Chairman Ben S. Bernanke told legislators yesterday that “restoring the size and composition” of the Fed’s record $2.32 trillion balance sheet to a “more normal configuration” is a long-term policy goal. St. Louis Fed President James Bullard said in an interview the central bank must start making plans now for future asset sales. “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future,” Bullard said. “We want to someday get back to a pre-crisis balance sheet — both the size of it and the fact that it would be an all-Treasuries balance sheet.” The Fed is finishing up purchases of $1.43 trillion in housing-related debt as part of efforts to support the mortgage market and economy. While the central bank could temporarily withdraw excess cash from the banking system, without asset sales the balance sheet would remain large for years and keep the Fed as a stakeholder in housing markets. The policies have been criticized for favoring a specific industry. “The programs are not monetary policy as conventionally defined, but rather fiscal policy or credit-allocation policy,” said Stanford University economist John Taylor , who also testified before the House committee yesterday. “They try to help some firms or sectors and not others.” Fed Independence Taylor has said the purchases jeopardize Fed independence by exposing it to pressure from lawmakers to use monetary policy to bail out favored industries. Fed officials are also concerned that the lack of budget discipline may result in calls for the Fed to begin buying government debt. Bernanke and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation. “The economy continues to require the support of accommodative monetary policies,” Bernanke said in testimony to the House Financial Services Committee. He said the central bank will be ready to tighten credit “at the appropriate time.” Bernanke also told the panel that the “appropriate” size of the Fed’s balance sheet would be less than $1 trillion and stressed that an exit from housing assets is a policy goal. The Fed’s total assets stood at $878.5 billion at the start of 2007. David Greenlaw , chief fixed-income economist at Morgan Stanley, said that some policy makers believe shrinking the balance sheet could help contain inflation expectations. Risk of Losses Fed officials may also be concerned that the central bank could end up losing money if short-term interest rates rose above the yield on the Fed’s portfolio of mortgage and Treasury bonds. In that case, it might have to ask the Treasury for cash to fund its operations. “The political problems attached to that are monumental for the Fed” at a time of record U.S. budget deficits, Greenlaw said. Bullard, 49, said there’s no agreement among policy makers on when to begin selling assets, and the economic recovery remains too fragile to start immediately. “I don’t think you could do any kind of tightening policy right now,” said Bullard, who stressed he wasn’t commenting on the Fed chairman’s remarks or on the views of his Fed colleagues. Time Horizon “You have to think about what kind of time horizon you want to get back to that normal balance sheet, and probably that has to involve some asset sales at some point,” said Bullard, who is a voting member of the rate-setting Federal Open Market Committee this year. In his testimony, Bernanke said policy makers “would like to get back to an all-Treasury portfolio within a reasonable amount of time.” “I anticipate that at some point we will in fact have a gradual sales process,” said the former Princeton University professor. Bernanke, 56, avoided repeating a February statement that the Fed won’t sell any securities “at least until after policy tightening has gotten under way.” Instead, he said the tool is one way of “applying monetary restraint.” The choice of tools the Fed could use to tighten policy — which include selling deposits to banks, tying up reserves and raising the rate the Fed pays on excess reserves held by banks – - will “depend on economic and financial developments.” The Fed’s large-scale asset purchases were a signature of Bernanke’s “credit easing” policy. The Fed chairman told lawmakers that “a range of evidence” shows the purchases helped improve conditions in mortgage markets and other private credit markets. Bullard said he would prefer to see some asset sales initially. “When the economy gets stronger, then maybe the natural thing to do would be to take back some of the quantitative easing,” he said in reference to asset sales. “Later on, you can decide whether you want to raise interest rates.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .

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Bullard Says Federal Reserve Must Start Planning For Future Asset Sales

March 25, 2010

By Craig Torres March 25 (Bloomberg) — The Federal Reserve must start making plans now for asset sales to meet its goal of returning a record $2.32 trillion balance sheet to its pre-crisis size and makeup, St. Louis Fed President James Bullard said. “We want to someday get back to a pre-crisis balance sheet — both the size of it and the fact that it would be an all- Treasuries balance sheet,” Bullard said today in a telephone interview. “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future.” The Fed responded to the financial crisis both through temporary liquidity backstops, most of which have closed or run off, and direct purchases of up to $1.43 trillion in housing- related debt. While the central bank could neutralize the monetary effects of those purchases, without asset sales the balance sheet would remain large for years and keep the Fed as a stakeholder in U.S. housing markets. “You have to think about what kind of time horizon you want to get back to that normal balance sheet, and probably that has to involve some asset sales at some point,” said Bullard, who is a voting member of the rate-setting Federal Open Market Committee this year. Bullard, 49, said there’s no agreement among policy makers on when to start the sales, and the economic recovery remains too fragile to start now. “I don’t think you could do any kind of tightening policy right now,” Bullard said. More Prominent Role Fed Chairman Ben S. Bernanke signaled today that sales of the central bank’s holdings of mortgage-backed securities may play a more prominent role in the withdrawal of monetary stimulus than he indicated last month. “I anticipate that at some point we will in fact have a gradual sales process,” Bernanke said today in testimony to the House Financial Services Committee. In prepared remarks, he avoided repeating a February statement that the Fed won’t sell any securities “at least until after policy tightening has gotten under way.” Instead, he said today the tool is one way of “applying monetary restraint.” The Fed’s large-scale asset purchases were a signature of Bernanke’s “credit easing” policy. The Fed chairman told lawmakers that “a range of evidence” shows the purchases helped improve conditions in mortgage markets and other private credit markets. The approach is a break from principles spelled out in a 2002 Fed study that warned against credit allocation. The purchases have also been criticized for jeopardizing Fed independence by some monetary scholars, such as Stanford University economist John Taylor , who also testified before the House committee today. “The programs are not monetary policy as conventionally defined, but rather fiscal policy or credit-allocation policy,” Taylor said, “because they try to help some firms or sectors and not others.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Bernanke Signals Bigger Role for Mortgage Securities Sales in Exit Plan

March 25, 2010

By Scott Lanman and Craig Torres March 25 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke signaled that sales of the central bank’s holdings in mortgage-backed securities may play a more prominent role in the withdrawal of monetary stimulus than he indicated last month. “I anticipate that at some point we will in fact have a gradual sales process,” Bernanke said today in testimony to the House Financial Services Committee. In prepared remarks, he avoided repeating a February statement that the Fed won’t sell any securities “at least until after policy tightening has gotten under way.” Instead, he said today the tool is one way of “applying monetary restraint.” By selling the assets, the Fed would reach its objective of holding only Treasury securities and return its $2.31 trillion balance sheet to levels prior to the financial crisis, Bernanke said. The Fed plans this month to complete buying $1.25 trillion of the housing debt, a program begun in January 2009 to lower home-loan rates and revive the economy. “Unless you are selling assets, you are not meaningfully and convincingly reducing the size of the balance sheet,” said Dan Greenhaus , chief economic strategist at Miller Tabak & Co. LLC in New York. The change in part reflects discussion among Fed policy makers at the Jan. 26-27 meeting, as reported in minutes released by the central bank. Some officials pushed to start selling assets in the “near future,” the minutes said. All participants agreed that Fed assets and banks’ excess cash would need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries. ‘Reasonable’ Time “We would like to get back to an all-Treasury portfolio within a reasonable amount of time,” Bernanke said in response to a question from Representative Jeb Hensarling , a Texas Republican. The balance sheet should eventually be reduced to less than $1 trillion, Bernanke told Representative Ron Paul , also a Texas Republican, who advocates abolishing the Fed. Prior to the financial crisis, the Fed limited its open- market operations to Treasuries to avoid the perception that it was intervening in a particular industry or market. The central bank chief and his colleagues have been outlining their strategy for tightening credit in time to prevent the recovery from stoking inflation. Officials are concerned that the federal funds rate, their main policy tool for 20 years, isn’t as effective as before in influencing borrowing costs. Raising the interest rate paid on funds deposited by banks at the Fed, as well as so-called reverse repurchase agreements that temporarily drain cash from the banking system, will still be among the main tools for tightening credit, Bernanke said. ‘Not Comfortable’ “The FOMC is not comfortable with holding all of these securities until they mature, as some would be 30 years, and we want to move more quickly than that back to the pre-crisis balance sheet,” Bernanke said. The Fed wouldn’t sell assets in a “really weak economy,” he said. The FOMC has been debating the topic of asset sales for months. James Bullard , president of the St. Louis Fed, called asset sales “very much a live issue at the FOMC right now” in a March 4 speech in St. Cloud, Minnesota. “It may make some sense to make adjustments on the quantitative easing side,” Bullard said. Asset sales could happen “while you are waiting to raise the short-term interest rate,” he said. Richmond Fed President Jeffrey Lacker has also been an advocate of asset sales. At the same time, Bernanke didn’t say when the Fed would begin executing its strategy. He said the U.S. economy still needs low interest rates and that the central bank will be ready to tighten credit “at the appropriate time.” ‘Accommodative’ Policies “The economy continues to require the support of accommodative monetary policies,” Bernanke said in prepared testimony , repeating parts of a statement to the panel from last month. Treasury two-year notes fell today, pushing the yield up one basis point, or 0.01 percentage point, to 1.1 percent at 3 p.m. in New York. The Standard & Poor’s 500 Index rose 0.6 percent to 1,174.10. Today’s hearing, originally scheduled for Feb. 10, was postponed because of a snowstorm. The Fed went ahead and released Bernanke’s prepared testimony that day, in part to lay the groundwork for a planned increase in the interest rate the central bank charges for direct loans to banks. Responding to questions, Bernanke said the “unemployment situation is very weak,” and the housing market is “still quite weak.” $1 Trillion The New York Fed said March 8 that it would use money- market mutual funds to eventually help drain as much as $1 trillion from the financial system so the central bank can tighten credit and raise interest rates. The Fed said in a statement on the reverse-repurchase agreement program that “no inference should be drawn about the timing of any prospective monetary-policy operation.” That move may be months away. U.S. central bankers will begin raising rates at the Nov. 3 FOMC meeting and increase the benchmark lending rate to 0.75 percent by the end of the year, according to the median estimate of economists surveyed by Bloomberg News from March 1 to March 10. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Lacker Calls Proposals to Weaken Fed Bank-Supervision Powers `Misguided’

March 1, 2010

By Craig Torres and Joshua Zumbrun March 1 (Bloomberg) — Federal Reserve Bank of Richmond President Jeffrey Lacker said legislative proposals to strip the Fed of bank supervision powers are “misguided,” threatening to weaken the central bank’s ability to lend to financial institutions. “As long as the Federal Reserve is responsible for discount-window lending, it makes no sense to diminish the Fed’s robust role in the supervision of a range of banking institutions, from large to small,” Lacker said today in the text of his remarks to the annual conference of the Institute of International Bankers in Washington. Congress is engaged in the most sweeping overhaul of financial regulation since the 1930s. Under some legislative proposals, Congress may curtail the Fed’s powers to provide emergency liquidity and supervise banks while strengthening its oversight of risk across the financial system. “Proposals to materially alter the Federal Reserve’s supervisory responsibilities strike me as misguided,” Lacker said. The central bank, under a bill passed by the House in December, would be a member of a systemic risk council and have powers to impose higher standards for liquidity, capital and risk management for firms deemed to pose a risk to the financial system. A discussion draft released by the Senate would concentrate bank supervision in a single agency. Lacker focused most of his remarks on the expansion of the federal safety net through government bailouts. Market discipline will be weakened as long as the government has a bias toward intervention to save firms and soften the blow for creditors and shareholders, he said. Strengthen Oversight Bank regulators that strengthen oversight of financial institutions they supervise will increase incentives for firms to engage in regulatory “by-pass” by obtaining funding outside of the banking system, Lacker said. “Money market mutual funds and the tri-party repurchase agreement (repo) market are two modern examples of such ‘regulatory by-pass’ that provide deposit-like liquidity without the regulatory burden associated with bank intermediation,” Lacker said. “Real regulatory reform requires eliminating the inherent ambiguity of the implicit component of the financial safety net,” Lacker said. “This cycle of crisis, rescue and by-pass is destined to recur, and with ever more force, unless we alter what market participants believe will happen when a financial firm becomes distressed,” he said. ‘Market Discipline’ A well-functioning financial system “requires a restoration of market discipline, and that will be impossible without clear boundaries on the federal financial safety net,” Lacker said. The Fed would also be subject to government audits of monetary policy under an amendment to the bill by Representative Ron Paul , a Republican from Texas. Under a Senate proposal, lawmakers would shield the Fed from monetary policy audits while removing its bank supervision powers. “I’m a great advocate of an independent Fed, and I would vehemently oppose the Ron Paul amendment,” Senate Banking Committee Chairman Christopher Dodd said Feb. 26 in an interview for Bloomberg Television’s “Political Capital With Al Hunt.” “Politicizing the Fed, that’s a slippery slope none of us ought to go down,” Dodd said. Dodd, a Connecticut Democrat, also said he wants the Fed to get back to “core functions.” He said he has “difficulty” with the Fed’s bank supervisory role because it may bring with it the “implicit obligation” to keep institutions they regulate from failing. Dodd has proposed consolidating bank supervision in a new agency. Direct Contact Lacker is chairman of the Fed’s Conference of Presidents and with Kansas City Fed President Thomas Hoenig is leading an effort to make direct contact with legislators to make their own case for regulatory reform. The Fed Board maintains a legislative affairs office in Washington, which is its usual channel for contacts with Congress. Hoenig in a Feb. 19 letter to senators said “pinning our hopes on a systemic-risk council and a consolidated super-agency would be a mistake.” St. Louis Fed bank president James Bullard in a Feb. 23 letter to three senators said the central bank was able to deal effectively with the crisis because of the “expertise and information that it acquires as a supervisor of banks.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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Bernanke Says `Nascent’ Recovery in U.S. Still Requires Low Interest Rates

February 24, 2010

By Craig Torres Feb. 24 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is in a “nascent” recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus expires. “A sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke told the House Financial Services Committee today in Washington at the start of his two days of semi-annual testimony before Congress. “Private final demand does seem to be growing at a moderate pace.” The 56-year-old Fed chairman, who began his second four- year term this month, said slack labor markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” He said the Fed will need to start tightening policy “at some point.” “The FOMC continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” he said. Bernanke’s testimony follows the Federal Reserve Board’s decision last week to raise the cost of direct loans to banks by a quarter-point to 0.75 percent. The Fed portrayed the move as a “normalization” of bank lending and said it didn’t change the outlook for the economy or monetary policy, a message the Fed chairman reiterated today. Labor Markets Bernanke cited “tentative” signs of stabilization in labor markets, such as lower job losses, a rise in manufacturing employment, and stronger demand for temporary help. “Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” Bernanke said. He said the 40 percent of the unemployed who have been without work for six months or more are a “particular concern.” Policy makers are trying to ensure a durable expansion that will start generating enough jobs to bring down an unemployment rate they forecast to end the year at 9.7 percent, above their estimate of full employment of around 5 percent. At the same time, they want to convince investors that they can start withdrawing $1.1 trillion in excess cash from the banking system in time to keep inflation at bay. “As the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” the Fed chairman said. “Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time,” he said. Manufacturing Rebound Manufacturing is leading the rebound from the worst recession since the 1930s as companies prevent inventories from being further depleted and invest in new machinery and equipment to take advantage of a rebound in global demand. The economy grew at a 5.7 percent annual pace in the fourth quarter of last year, the fastest in six years. Fed officials last month forecast growth in 2010 of 2.8 percent to 3.5 percent, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable. Bernanke said that conditions in financial markets have improved, making equity and debt financing available for larger firms. “In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects,” he said. Balance Sheet The Fed has expanded its balance sheet to $2.28 trillion in an attempt to supplement credit to the economy. U.S. central bankers are finishing up a $1.43 trillion in mortgage-backed securities and housing agency debt purchase program next month. “The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” Bernanke said. The actions by the central bank haven’t stimulated private bank credit. Total loans and leases by banks in the U.S. have fallen 7 percent for the 12 months ending January. Consumer loans have fallen 6.5 percent over the same period. “They want to see sustained job growth and credit growth to small businesses,” Michael Darda , chief economist at MKM Partners LP in Greenwich, Connecticut, said before the testimony was released. “The Fed is going to keep rates low and the balance sheet big until you see those two things start recovering.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ;

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Fed Discount-Rate Hike Signals End to Crisis Measures

February 19, 2010

By Craig Torres and Vivien Lou Chen Feb. 19 (Bloomberg) — The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse. Chairman Ben S. Bernanke and his colleagues at the Board of Governors raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, effective today. It was the first increase in the discount rate since June 2006. The Fed portrayed the decision as a “normalization” of lending that would have no impact on monetary policy, repeating in a statement in Washington yesterday that its benchmark federal funds rate would stay low for an “extended period.” The assurances didn’t stop investors from increasing bets that the Fed would tighten policy in the fourth quarter. The dollar rose and U.S. stock futures fell after the announcement. “The discount rate historically has always been used as a psychological tool for signaling the future course of monetary policy,” said Sung Won Sohn , former chief economist at Wells Fargo & Co. and now an economics professor at California State University-Channel Islands in Camarillo, California. “The bottom line is the Fed is signaling that in the future rates are more likely to go up, rather than stay stable or go down.” U.S. central bankers closed four emergency lending facilities this month and are preparing to reverse or neutralize the more than $1 trillion in excess bank reserves they have pumped into the banking system. The discount-rate increase will encourage banks to borrow in private markets rather than from the Fed, the statement said. ‘Time of Uncertainty’ “There is no way of doing this in times of uncertainty and not cause some reaction in financial markets,” said David Montero-Rosen , chief investment officer at the Graham & Dodd Fund LLC in New York. The dollar rose to $1.3485 per euro as of 1:06 p.m. in Tokyo from $1.3527 late yesterday in New York, after climbing to $1.3444, the strongest since May 18. Futures on the Standard & Poor’s 500 Index expiring in March lost 1.1 percent to 1,093.50. Bernanke prepared investors for the move in Feb. 10 testimony to Congress, saying the discount rate would have to be raised “before long.” In the minutes of the January 26-27 Federal Open Market Committee meeting released Feb. 17, policy makers said an increase “would soon be appropriate.” Even so, the increase came sooner than many analysts and investors expected. ‘Big Surprise’ “The big surprise was the timing,” said Alan Ruskin , head of currency strategy at RBS Securities Inc. in Stamford, Connecticut. “This is just one more very, very clear signal that the abnormal liquidity provisions provided during the crisis are being withdrawn.” Fed Bank of St. Louis President James Bullard yesterday said expectations for an interest-rate increase were exaggerated. “The idea that’s in markets that there’s a high probability that we’ll raise rates later this year is overblown,” Bullard said in response to audience questions after a speech in Memphis, Tennessee. “There’s also some probability, maybe more, that this will extend into 2011.” Larry Meyer , a former Fed governor and vice chairman of Macroeconomic Advisers LLC in Washington, said yesterday’s decision “says absolutely nothing” about the timing of the first increase in the federal funds rate. “We believe that the Fed will not raise the funds rate for the first time until the middle of 2011,” Meyer said in a Bloomberg Television interview. Rate Near Zero The Fed has kept the benchmark rate for overnight borrowing between banks to a range of zero to 0.25 percent since December 2008 and repeated after last month’s policy meeting that the rate would stay low for an “extended period.” Fed officials have nevertheless been warning financial institutions to be prepared for higher rates and are keeping a close watch on leverage, market valuations and overall financial conditions. In January, the Fed Board issued an advisory with other regulators urging banks to strengthen their management of interest-rate risk. Yesterday’s announcement was “basically a psychological message to the marketplace that at some point the Fed does have to begin to pay attention to the potential of inflation down the road,” Kelly King , chairman and chief executive of BB&T Corp., said in an interview with Bloomberg Television. “I don’t think they are going to be moving short-term rates anytime in the very near future.” Regional Fed Banks King is a member of the Richmond Fed’s board of directors, which, like the 11 other regional Fed boards, has the authority to request changes in the discount rate. Those requests are subject to final review and determination by the Board of Governors. The Board said yesterday it approved requests for the rate increase from all 12 regional Fed banks. Lenders have borrowed less from the Fed’s district banks as the crisis ebbed and the economy returned to growth. Financial institutions have reduced their reliance on the Fed window. Banks had borrowed $14.1 billion as of Feb. 17, representing less than 1 percent of the central bank’s $2.28 trillion in total assets. A year ago, borrowing stood at $65.1 billion. The Fed continues to add reserves to the banking system with its purchases of $1.43 trillion in housing debt, which are scheduled to end next month. Bernanke used the discount rate as his first policy tool to attack the financial crisis. Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As subprime mortgage defaults began to ripple through the financial system in August 2007, the Fed reduced the spread to half a percentage point and lengthened the term to 30 days from overnight. Bear Stearns Following the rescue of Bear Stearns Cos. in March 2008, the Fed again lowered the spread to a quarter point and extended the term to 90 days. The term was later reduced to 28 days. Yesterday, the Fed board said that effective March 18, the maturity on discount- window loans will be shortened to overnight. The changes are “not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” yesterday’s statement said. Fed officials reinforced the message in speeches that were previously scheduled for last night. Atlanta Fed President Dennis Lockhart told a Georgia business audience that policy “remains accommodative.” Fed Governor Elizabeth Duke , speaking in Norfolk, Virginia, said the steps “do not signal any change in the outlook for monetary policy.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Vivien Lou Chen in Memphis at vchen1@bloomberg.net

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Fed Discount-Rate Increase Signals Retreat From Emergency Monetary Easing

February 18, 2010

By Craig Torres and Vivien Lou Chen Feb. 19 (Bloomberg) — The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse. Chairman Ben S. Bernanke and his colleagues at the Board of Governors raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, effective today. It was the first increase in the discount rate since June 2006. The Fed portrayed the decision as a “normalization” of lending that would have no impact on monetary policy, repeating in a statement in Washington yesterday that its benchmark federal funds rate would stay low for an “extended period.” The assurances didn’t stop investors from increasing bets that the Fed would tighten policy in the fourth quarter. The dollar rose and U.S. stock futures fell after the announcement. “The discount rate historically has always been used as a psychological tool for signaling the future course of monetary policy,” said Sung Won Sohn , former chief economist at Wells Fargo & Co. and now an economics professor at California State University-Channel Islands in Camarillo, California. “The bottom line is the Fed is signaling that in the future rates are more likely to go up, rather than stay stable or go down.” U.S. central bankers closed four emergency lending facilities this month and are preparing to reverse or neutralize the more than $1 trillion in excess bank reserves they have pumped into the banking system. The discount-rate increase will encourage banks to borrow in private markets rather than from the Fed, the statement said. ‘Time of Uncertainty’ “There is no way of doing this in times of uncertainty and not cause some reaction in financial markets,” said David Montero-Rosen , chief investment officer at the Graham & Dodd Fund LLC in New York. The dollar rose to $1.3485 per euro as of 1:06 p.m. in Tokyo from $1.3527 late yesterday in New York, after climbing to $1.3444, the strongest since May 18. Futures on the Standard & Poor’s 500 Index expiring in March lost 1.1 percent to 1,093.50. Bernanke prepared investors for the move in Feb. 10 testimony to Congress, saying the discount rate would have to be raised “before long.” In the minutes of the January 26-27 Federal Open Market Committee meeting released Feb. 17, policy makers said an increase “would soon be appropriate.” Even so, the increase came sooner than many analysts and investors expected. ‘Big Surprise’ “The big surprise was the timing,” said Alan Ruskin , head of currency strategy at RBS Securities Inc. in Stamford, Connecticut. “This is just one more very, very clear signal that the abnormal liquidity provisions provided during the crisis are being withdrawn.” Fed Bank of St. Louis President James Bullard yesterday said expectations for an interest-rate increase were exaggerated. “The idea that’s in markets that there’s a high probability that we’ll raise rates later this year is overblown,” Bullard said in response to audience questions after a speech in Memphis, Tennessee. “There’s also some probability, maybe more, that this will extend into 2011.” Larry Meyer , a former Fed governor and vice chairman of Macroeconomic Advisers LLC in Washington, said yesterday’s decision “says absolutely nothing” about the timing of the first increase in the federal funds rate. “We believe that the Fed will not raise the funds rate for the first time until the middle of 2011,” Meyer said in a Bloomberg Television interview. Rate Near Zero The Fed has kept the benchmark rate for overnight borrowing between banks to a range of zero to 0.25 percent since December 2008 and repeated after last month’s policy meeting that the rate would stay low for an “extended period.” Fed officials have nevertheless been warning financial institutions to be prepared for higher rates and are keeping a close watch on leverage, market valuations and overall financial conditions. In January, the Fed Board issued an advisory with other regulators urging banks to strengthen their management of interest-rate risk. Yesterday’s announcement was “basically a psychological message to the marketplace that at some point the Fed does have to begin to pay attention to the potential of inflation down the road,” Kelly King , chairman and chief executive of BB&T Corp., said in an interview with Bloomberg Television. “I don’t think they are going to be moving short-term rates anytime in the very near future.” Regional Fed Banks King is a member of the Richmond Fed’s board of directors, which, like the 11 other regional Fed boards, has the authority to request changes in the discount rate. Those requests are subject to final review and determination by the Board of Governors. The Board said yesterday it approved requests for the rate increase from all 12 regional Fed banks. Lenders have borrowed less from the Fed’s district banks as the crisis ebbed and the economy returned to growth. Financial institutions have reduced their reliance on the Fed window. Banks had borrowed $14.1 billion as of Feb. 17, representing less than 1 percent of the central bank’s $2.28 trillion in total assets. A year ago, borrowing stood at $65.1 billion. The Fed continues to add reserves to the banking system with its purchases of $1.43 trillion in housing debt, which are scheduled to end next month. Bernanke used the discount rate as his first policy tool to attack the financial crisis. Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As subprime mortgage defaults began to ripple through the financial system in August 2007, the Fed reduced the spread to half a percentage point and lengthened the term to 30 days from overnight. Bear Stearns Following the rescue of Bear Stearns Cos. in March 2008, the Fed again lowered the spread to a quarter point and extended the term to 90 days. The term was later reduced to 28 days. Yesterday, the Fed board said that effective March 18, the maturity on discount- window loans will be shortened to overnight. The changes are “not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” yesterday’s statement said. Fed officials reinforced the message in speeches that were previously scheduled for last night. Atlanta Fed President Dennis Lockhart told a Georgia business audience that policy “remains accommodative.” Fed Governor Elizabeth Duke , speaking in Norfolk, Virginia, said the steps “do not signal any change in the outlook for monetary policy.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Vivien Lou Chen in Memphis at vchen1@bloomberg.net

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Fed Raises Discount Rate as Crisis Abates

February 18, 2010

By Craig Torres Feb. 18 (Bloomberg) — The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. “These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” The dollar jumped and Treasuries extended losses as the Fed took another step in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group Inc. “This is an unwinding of another unusual and exigent circumstance,” said David Zervos , visiting adviser to the Fed Board in 2009 who is now a managing director at Jeffries & Co. in New York. “They tried to go out of their way to tell people this doesn’t change their policy outlook at all.” The dollar rose 0.7 percent to $1.3514 per euro at 5:19 p.m. in New York from $1.3607 yesterday. It touched $1.3502, the strongest level since May. The yield on the 10-year Treasury note rose seven basis points to 3.8 percent. Maturity Shortened The discount rate increase is effective on Feb. 19. The Board also said that effective March 18 “the typical maximum maturity for primary credit loans will be shortened to overnight.” The Fed Board said the outlook for policy remains “about as it was at the January meeting of the Federal Open Market Committee.” The central bank also cited last month’s statement, which said economic conditions are likely to warrant “exceptionally low” levels of the federal funds rate “for an extended period.” It was the first increase in the discount rate in more than three years, and the move widens the rate’s spread over the top range for the benchmark federal funds rate to 0.5 percentage point. Maximum Maturity “The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds,” the Fed Board said in a statement. “The Federal Reserve will assess over time whether further increases in the spread are appropriate.” Financial institutions’ reliance on Fed credit has waned as market liquidity improved. Discount window loans stood at $14.1 billion on Feb. 17, down from $65.1 billion about a year earlier. Fed Chairman Ben S. Bernanke telegraphed the move in Feb. 10 testimony to Congress when he said investors should expect a “modest increase” in the rate “before long.” Using language similar to today’s statement, he said a move shouldn’t be interpreted as a change in policy. The Fed’s lending programs and their May 2009 review of the capital needs of the 19 largest banks helped restore confidence and liquidity in interbank lending markets. The TED spread, the difference between what the Treasury and banks pay to borrow dollars for three months, has narrowed to 0.15 percentage point from as high as 4.64 percentage points in October 2008. Emergency Facilities The central bank closed four emergency lending facilities, including the Primary Dealer Credit Facility and Term Securities Lending Facility, on Feb. 1. Primary dealer credit stood at $146.5 billion two weeks after the collapse of Lehman Brothers Holdings Inc. in September 2008. The facility had a zero balance when the Fed closed it in February. The Federal Open Market Committee left the benchmark overnight lending rate in a range of zero to 0.25 percent at their meeting Jan. 27. Minutes from the meeting said officials “agreed it would soon be appropriate” to reduce the term of discount window loans to overnight and widen the spread over the federal funds rate . The minutes also said that the discount window change didn’t signal an immediate change in the benchmark lending rate. Normal Footing Fed officials “generally agreed that such steps to return the Federal Reserve’s liquidity provision to a normal footing would be technical adjustments.” Prior to the financial crisis, the Fed kept the primary credit discount rate 1 percentage point above the target for the federal funds rate. The Fed increased the term on the loans to 90 days during market turmoil in March 2008, and reduced it 28 days on Jan. 14 this year. Discount rate changes are requested by boards of directors at the 12 regional Fed banks. The Fed Board said it approved requests for the rate increase from all 12 regional Fed banks. Discount rate change requests are subject to final review and determination by the Board of Governors in Washington. Fed governors review discount rate requests about every two weeks. To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ;

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Fed Sets Goal of `Eventual’ Exit From Housing Finance to Protect Autonomy

February 18, 2010

By Craig Torres Feb. 18 (Bloomberg) — Federal Reserve officials set a long-term goal to keep only U.S. government securities in their portfolio as they debated how and when to pull back on the most aggressive monetary policy in U.S. history. Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries. Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech . “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.” Policy makers agreed that it “will eventually be appropriate” to “return to holding only securities issued by the U.S. Treasury,” according to minutes of their January 26-27 meeting released yesterday. “They are putting down a marker, as much as a signal to the administration as anything else, that they don’t want to be in the credit-allocation game,” said Dino Kos , managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed. U.S. central bankers are channeling credit to housing markets through purchases of $1.25 trillion in mortgage-backed securities and $175 billion in housing agency debt. Those programs end next month. Chairman Ben S. Bernanke has said the purchases are needed to support housing markets, whose collapse triggered the worst crisis since the Great Depression. Discount Rate Fed officials in their January meeting also agreed that it would “soon be appropriate” to raise the discount rate, at which banks borrow directly from the central bank, and reduce the maturity of the loans to overnight from 28 days. The Fed’s actions to combat the financial crisis have created scrutiny of the central bank in Congress, which is taking up the most extensive rewrite of financial regulation since the 1930s. The House voted Dec. 11 to approve a proposal by Representative Ron Paul , a Republican from Texas, to end a ban on audits of monetary policy over Bernanke’s warnings the measure threatens to compromise Fed independence. The Fed typically uses the purchase and sale of Treasury securities to change the benchmark federal funds rate by making bank reserves less or more available. At the start of 2007, the central bank’s securities portfolio was made up of mostly Treasuries. Allocating Credit Before the crisis, the Fed avoided allocating credit to specific markets. In a study of open-market operations published in 2002, the central bank’s staff warned about changing the composition of the Fed’s portfolio. The mission of the Fed “is statutorily cast in terms of macroeconomic outcomes,” the document said. “Outcomes for specific sectors and for relative prices of credit or assets are within the purview of private markets and fiscal policy.” A return to a policy of holding only Treasury securities, even if it’s a goal for now, indicates Bernanke is seeking to assure investors the Fed is committed to independence and to its mandate to maintain stable prices and full employment, former officials said. “What the Fed is doing is showing markets a rope,” said Vincent Reinhart , a resident scholar at the American Enterprise Institute in Washington and the former director of Monetary Affairs at the Fed’s Board of Governors. “They are trying to provide a safe port and show the Federal Reserve will always do what is right and has a long-run strategy.” Emergency Lending Fed officials closed four emergency lending programs this month and are now considering the timing and use of several tools to remove or neutralize more than $1 trillion in excess reserves from the banking system. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Bernanke also said in congressional testimony on Feb. 10 that the U.S. central bank would “before long” raise the discount rate to widen the spread over the federal funds rate. In December 2008, the Fed cut the discount rate to 0.5 percent as it lowered the benchmark federal funds rate, which banks use for overnight loans to each other, to a range of zero to 0.25 percent. Both rates have been unchanged since then. Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As bank lending began to freeze that month, the Fed reduced the difference to a half-point and narrowed it again, to a quarter-point, in March 2008 in conjunction with its rescue of Bear Stearns Cos. To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Officials Debated Shrinking Balance Sheet, January FOMC Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Officials Debated Shrinking Balance Sheet, January FOMC Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Officials Debated Reducing Balance Sheet at Last Meeting, Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Bernanke Says Federal Reserve May Opt to Raise Discount Rate `Before Long’

February 10, 2010

By Scott Lanman and Craig Torres Feb. 10 (Bloomberg) — The Federal Reserve may raise the discount rate “before long” as part of the “normalization” of Fed lending, a move that won’t signal any change in the outlook for monetary policy, Chairman Ben S. Bernanke said. Bernanke repeated the Federal Open Market Committee statement that low rates are warranted “for an extended period” in testimony prepared for the House Financial Services Committee. The Fed may also temporarily replace the federal funds rate as a policy guide with interest it pays on banks’ deposits should fed funds become a “less reliable indicator than usual,” Bernanke said. Bernanke, who this month started his second four-year term as Fed chief, previewed what would be the first interest-rate move in more than a year while giving more details on several tools that may be used to tighten credit “at some point.” Bernanke, 56, and his fellow policy makers are preparing to remove unprecedented monetary stimulus as the U.S. economy is forecast to grow at the fastest pace since 2006. “Before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate ,” Bernanke said in the testimony for a hearing originally scheduled for today and postponed because of a snowstorm. A new date hasn’t been announced. Two-year Treasury securities fell, pushing the yield to 0.84 percent at 10:07 a.m. in New York from 0.83 percent yesterday. U.S. stocks extended declines, with the Standard & Poor’s 500 Index falling 0.5 percent to 1,064.77. The dollar extended gains against the euro. Outlook for Policy The changes “are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC,” Bernanke said. In December 2008, the Fed cut the discount rate, charged on direct loans to commercial banks, to 0.5 percent as it lowered the separate federal funds rate, which banks use for overnight loans to each other, to a range of zero to 0.25 percent. Both rates have been unchanged since then. “Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” Bernanke said. Lending Freeze Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As bank lending began to freeze that month, the Fed reduced the difference to a half-point and narrowed it again, to a quarter-point, in March 2008 in conjunction with its rescue of Bear Stearns Cos. The central bank has already reduced the maximum term of discount-window loans to banks to 28 days from 90 days, “and we will consider whether further reductions in the maximum loan maturity are warranted,” Bernanke said. The Fed incurred no losses on its $1.5 trillion of emergency lending programs, and the Board of Governors “continues to anticipate” it will not lose money on the bailouts of Bear Stearns and New-York based insurer American International Group Inc. The Fed’s portion of those rescues totals about $116 billion, Bernanke said. The Fed’s unprecedented actions under Bernanke have helped thaw credit markets. The Libor-OIS spread, a gauge of banks’ willingness to lend, has narrowed to 0.10 percentage point from a record 3.64 points in October 2008. The TED spread, the difference between what the Treasury and banks pay to borrow dollars for three months, has narrowed to 0.15 percentage point from as high as 4.64 percentage points in October 2008. Deposits at Fed Separately, Bernanke said raising the interest rate paid on funds deposited by banks at the Fed, as well as so-called reverse repurchase agreements that temporarily drain cash from the banking system, will probably be the first tools for tightening credit. Bernanke said he doesn’t expect the Fed “in the near term” to sell the $1.43 trillion of housing debt being purchased through next month, “at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.” Fed officials may decide “in the future” to sell securities, he said. “Any such sales would be at a gradual pace, would be clearly communicated to market participants and would entail appropriate consideration of economic conditions,” Bernanke said. The purchases have helped push total assets on the Fed’s balance sheet to $2.25 trillion from $925 billion at the start of 2008. Excess reserves in the banking system total more than $1 trillion. Removing Reserves The central bank can use several tools to temporarily remove those reserves from the financial system and thereby raise the federal funds rate. Bernanke said the Fed is expanding the set of counterparties for reverse repurchase agreements, under which it provides securities as collateral in exchange for a short-term cash loan. Bernanke said “one possible sequence” of the exit strategy involves first testing tools for draining reserves “on a limited basis.” Then, “as the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates,” he said. ‘Firming’ of Policy The Fed would then execute the “actual firming of policy” by raising the interest rate on bank reserves, Bernanke said. Congress granted the Fed the power in October 2008 as part of the law creating the $700 billion Troubled Asset Relief Program. While Fed officials have previously said the deposit rate will play a major role in the exit strategy, Bernanke said the rate may replace the federal funds rate, the policy benchmark for the past two decades, until reserves are “much lower.” “It is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates,” Bernanke said. The Fed may be months away from tightening credit. U.S. central bankers will begin raising rates in November and increase the benchmark lending rate to 0.75 percent by the end of the year, according to the median estimate of economists surveyed by Bloomberg News in January. The U.S. economy will expand 2.7 percent this year, according to the median estimate. The timing and speed of rate increases may also depend on how quickly the economy can begin to generate job growth. “It is great that he is laying out a blueprint. It will reduce market uncertainty,” said Karl Haeling , head of strategic debt distribution at Landesbank Baden-Wuerttemberg, Germany’s third-largest bank, before the release of the testimony. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Declares Recovery for First Time, Prepares Ground for End to Stimulus

January 28, 2010

By Craig Torres Jan. 28 (Bloomberg) — The Federal Reserve panel in charge of interest rates declared for the first time the U.S. economy is in “recovery” and took several steps to prepare investors for the removal of aggressive monetary stimulus. The Federal Open Market Committee yesterday upgraded its economic outlook, reaffirmed it will end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities and expressed less confidence inflation will remain “subdued.” “This is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path,” said Christopher Rupkey , chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Policy makers need to think seriously on how they are going to reset the message on the low rates policy.” Central bankers repeated their pledge to keep the benchmark lending rate in a range of zero to 0.25 percent for “an extended period,” while noting the economy “continued to strengthen.” Kansas City Federal Reserve Bank President Thomas Hoenig dissented, favoring a quicker adjustment to the rate outlook message. Hoenig “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” the FOMC said in yesterday’s statement. Inflation “is likely to be subdued for some time,” policy makers said. Last month, the panel said inflation “will remain subdued.” ‘More Comfortable’ “They are starting to get more comfortable with the sustainability of the recovery,” said Stephen Stanley , chief economist at RBS Securities Inc. in Stamford, Connecticut. “The downside risks that they were so worried about are probably still there but diminishing in importance.” Policy makers are winding down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008. The Fed also repeated that it will close four programs supporting money markets and bond dealers in February, as well as dollar swap programs with central banks in Europe and Asia. The central bank is “prepared to modify these plans if necessary to support financial stability and economic growth,” the statement said. The Fed also said it is winding down the Term Auction Facility and will hold a final auction on March 8. Confirmation Vote Chairman Ben S. Bernanke , who faces a procedural vote in the Senate on his confirmation for a second term today, is looking for signs that the return to economic growth is accompanied by the prospect of stronger hiring and an increase in credit to people and businesses. The Senate plans to vote on limiting debate and preventing lawmakers from blocking a vote on Bernanke’s nomination. As of yesterday, 50 senators said they would vote for or were inclined to support Bernanke, while 22 were opposed, according to a tally by Bloomberg News. The U.S. unemployment rate held at 10 percent in December, while consumer credit dropped a record $17.5 billion in November. “Household spending is expanding at a moderate rate, but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Fed said in its statement. Employers “remain reluctant to add to payrolls,” and bank lending “continues to contract,” the FOMC said. Verizon Communications Inc., coping with subscriber losses at its fixed-line phone business, said this week it will cut about 13,000 jobs at the division this year. Home Depot Inc. , the world’s largest home-improvement retailer, said it will pare 1,000 U.S. jobs. Consumer Wealth Stocks have provided no increase in consumer wealth this year. The Standard & Poor’s 500 Index has declined 1.6 percent, and the Nasdaq Composite Index has lost more than 2 percent. Last year, the indexes rose 23.5 percent and 44 percent, respectively. Officials kept have kept their benchmark overnight lending rate between banks in a range of zero to 0.25 percent for more than a year. Policy makers said that the “extended period” pledge is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” Production in the U.S. rose for a sixth consecutive month in December, and housing markets are stabilizing. Industrial production rose 0.6 percent last month, pushing up factory capacity in use to 72 percent. That’s still below the average plant-use rate of 78.5 percent from 2000 through 2007. The economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to the median estimate of economists surveyed by Bloomberg News. The government will release its advance report on gross domestic product tomorrow. “The Fed can tolerate 3 to 4 percent growth for a couple of quarters,” said John Silvia , chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It would be a ticklish situation if the inflation numbers ticked up.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Keeps `Extended Period’ Rate Pledge

January 27, 2010

By Craig Torres Jan. 27 (Bloomberg) — The Federal Reserve kept interest rates near zero and restated its intention to cease buying mortgage-backed securities in March, while losing unanimity on how long to keep borrowing costs low. At the same time, “the Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” the Federal Open Market Committee said in a statement today in Washington. Policy makers are keeping interest rates “exceptionally low” for an “extended period” as they wind down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008. Kansas City Fed President Thomas Hoenig dissented, saying “financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.” Stocks fell in the minutes after the decision was released before recovering. Ten-year Treasury notes declined and the dollar gained. The Fed also repeated that it will close four facilities supporting money markets and bond dealers in February, as well as dollar swap programs with central banks in Europe and Asia. The central bank is “prepared to modify these plans if necessary to support financial stability and economic growth,” the statement said. The Fed also said it is winding down the Term Auction Facility and will hold a final auction on March 8. Return to Growth Chairman Ben S. Bernanke, who tomorrow faces a procedural vote in the Senate on his confirmation for a second term, is looking for signs that the return to economic growth is generating jobs and is accompanied by an increase in credit to people and businesses. The U.S. unemployment rate held at 10 percent in December, while consumer credit dropped a record $17.5 billion in November. “Household spending is expanding at a moderate rate, but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Fed said in its statement. Businesses “remain reluctant to add to payrolls.” Verizon Communications Inc. , coping with subscriber losses at its fixed-line phone business, said yesterday it will cut about 13,000 jobs at the division this year. Home Depot Inc ., the world’s largest home-improvement retailer, also said yesterday it will pare 1,000 U.S. jobs. Consumer Wealth Stocks have provided no increase in consumer wealth this year. The Standard & Poor’s 500 Index is down more than 2 percent, and the Nasdaq Composite Index has lost more than 3 percent. Last year, the indexes rose 23.5 percent and 43.9 percent, respectively. Officials kept their benchmark overnight lending rate between banks in a range of zero to 0.25 percent, where it has been for more than a year. Policy makers said that low rates are contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations .” “Their forecast is for a subdued recovery and the data have been consistent with that,” Julia Coronado, senior economist at BNP Paribas SA in New York, said before the statement. “Retail sales edged lower in December, and credit is still contracting.” Factory Capacity Production in the U.S. rose for a sixth consecutive month in December, and housing markets are stabilizing. Industrial production rose 0.6 percent last month, pushing up factory capacity in use to 72 percent. That’s still below the average plant-use rate of 78.5 percent from 2000 through 2007. “You have sustainable growth, but far below the trend rate” needed to lower unemployment, John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before today’s Fed decision. “I don’t see how the Fed is going to start raising rates with the unemployment rate at 10 percent.” The economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to the median estimate of economists surveyed by Bloomberg News. The government will release its advance report on gross domestic product Jan. 29. Home Sales Sales of existing homes rose 4.9 percent to 5.16 million in 2009, the first gain in four years, the National Association of Realtors said this week. Fed officials will be watching to see if the end of their mortgage bond purchase programs hinders a recovery in housing. The average rate on a 30-year fixed mortgage fell to 4.99 percent the week of Jan. 21 from 5.06 percent the previous week, according to Freddie Mac of McLean, Virginia. The 56-year-old Fed chairman’s first four-year term expires at the end of this month, and the Senate hasn’t yet confirmed the former Princeton University professor for a second four-year term. Bernanke has presided over two years of economic growth that were followed by a financial crisis that produced the worst recession since the Great Depression. The economy contracted at a 5.4 percent annual rate in the fourth quarter of 2008 and at a 6.4 percent rate in the first quarter of 2009. Labor-Market Weakness Employers cut 85,000 jobs in December, after revisions showed a gain of 4,000 in November, the first in almost two years. The unemployment rate held at 10 percent. Wal-Mart Stores Inc., the world’s largest retailer, will eliminate about 11,200 jobs at its Sam’s Club membership warehouse clubs in the U.S. as it hires an outside company to demonstrate products. Dallas-based financial services company Comerica Inc. said Jan. 21 that it plans to cut 300 jobs, or about 3 percent of its total workforce, this year. U.S. central bankers forecast in November a slow decline in unemployment this year with the jobless rate averaging 9.3 percent to 9.7 percent in the fourth quarter, according to their central tendency estimates. “We’ll definitely see job growth in 2010,” New York Federal Reserve Bank President William Dudley told the Nightly Business Report on PBS Television Jan. 13. “Whether it’ll be sufficient to bring down the unemployment rate, materially, remains to be seen.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Regulators Warn U.S. Banks to Guard Against Risk of Rising Interest Rates

January 7, 2010

By Scott Lanman and Craig Torres Jan. 7 (Bloomberg) — U.S. regulators including the Federal Reserve warned banks to guard against possible losses from an end to low interest rates and reduce exposure or raise capital if needed. “In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates,” the Federal Financial Institutions Examination Council, which includes the Fed, Federal Deposit Insurance Corp. and other agencies, said in a statement today. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

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Fed’s Kohn Says Credit Constraints, Consumer Caution May Impede Spending

January 3, 2010

By Craig Torres Jan. 3 (Bloomberg) — Federal Reserve Vice Chairman Donald Kohn said tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets. “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow,” Kohn said today in a speech to the American Economic Association in Atlanta. Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent for a year to support an economy that is recovering from the worst recession since the Great Depression. “Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said. He also said the central bank won’t keep rates low to help finance government spending. “A large and growing federal deficit will not stop the Federal Reserve from exiting from current policies when that’s needed to keep prices stable and the economy on a path to sustained high employment,” Kohn said. The U.S. central bank, attempting to restore liquidity and credit, has expanded its balance sheet to $2.24 trillion from $858 billion at the start of 2007. As a result of the Fed’s purchases of $1.7 trillion in mortgage-backed, federal agency, and Treasury bonds, banks hold more than $1 trillion in reserves in excess of what they’re required to hold against deposits. Eventual Exit Central bankers are discussing how they will eventually exit their low-rate policy and drain excess cash in the banking system to head off inflation. At their December meeting, they said they would shut down emergency lending programs for commercial paper issuers and bond dealers in February as credit has become more available. “We have no shortage of tools for firming the stance of policy, and we will be able to unwind our actions when and as appropriate,” Kohn said. “The appropriate use and sequencing of these tools is under active discussion by the FOMC .” Banks haven’t started to circulate the reserves. Loans and leases of commercial banks in the U.S. declined to $6.8 trillion in November from $7.2 trillion a year earlier, according to Fed data. “In an environment of considerable persisting slack in labor and product markets, and with productivity having increased substantially in recent quarters, cost and price inflation should remain quite subdued,” Kohn said. Previous Month The personal consumption expenditures price index, minus food and energy, rose 1.4 percent in the year ending November, matching the annual rate of the previous month. The economy expanded at a 2.2 percent annual rate in the third quarter. That wasn’t fast enough to drive the unemployment rate lower. The nation’s jobless rate stood at 10 percent in November, up from 9.8 percent in September. The rate will probably stay at 10 percent in December, according to the median estimate in a Bloomberg News survey of economists. The Labor Department plans to release the December jobs report on Jan. 8. Unemployment soared to a 26-year high of 10.2 percent in October. Kohn, 67, is the most experienced central banker serving as a governor at the Fed Board . He began his career at the Kansas City Fed in 1970. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Keeps Pledge on `Exceptionally Low’ Rates, Says Economy Strengthening

December 16, 2009

By Craig Torres Dec. 16 (Bloomberg) — The Federal Reserve repeated its pledge to keep interest rates “exceptionally low” for “an extended period” and said the economy is strengthening. “Deterioration in the labor market is abating,” the Federal Open Market Committee said in a statement today after meeting in Washington. “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.” Policy makers led by Chairman Ben S. Bernanke , who faces a confirmation vote for a second term by the Senate Banking Committee tomorrow, met after a week of reports suggesting growth is picking up. With inflation forecast to be “subdued for some time,” investors maintained bets the Fed won’t tighten policy until August to bring down a jobless rate near a 26-year high. “The economy has stabilized, the recession is over,” said Mickey Levy , chief economist at Bank of America in New York. “The Fed is not at the point where it is willing to say the recovery is sustainable.” Two-year Treasury notes were little changed at 4:25 p.m. in New York, with yields at 0.84 percent. The dollar strengthened 0.2 percent to 89.79 yen from 89.61 yen late yesterday. Benchmark Rate Unchanged Officials kept their benchmark overnight lending rate between banks in a range of zero to 0.25 percent, where it has been for a year. Policy makers restated that low interest rates are contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations .” The decision was unanimous. The consumer price index, minus food and energy, rose 1.7 percent for the 12 months ending November, unchanged from October, the Labor Department reported today. The Fed also said it will continue purchases of agency mortgage-backed securities totaling $1.25 trillion and about $175 billion of agency debt through the first quarter of next year. “Financial market conditions have become more supportive of economic growth,” today’s FOMC statement said. With improvements in the functioning of markets, the FOMC and the Fed’s Board of Governors reiterated that “most of the Federal Reserve’s special liquidity facilities will expire on Feb. 1 2010,” including programs to backstop money-market mutual funds and commercial paper. Swap Arrangements “The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010,” the statement said, referring to auctions of loans to commercial banks. The Fed also said it’s working with other central banks to close temporary liquidity swap arrangements by Feb. 1. Reports last week suggested the expansion that started in the third quarter is accelerating. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Inventories rose in October for the first time since August 2008, and exports in the same month increased to the highest levels in 11 months. The numbers prompted economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. to raise their forecasts for fourth quarter growth by a full percentage point. JPMorgan lifted its estimate to a 4.5 percent annual rate, and Goldman economists increased their estimate to 4 percent. Gross domestic product grew 2.8 percent in the third quarter after shrinking for each of the previous four quarters. ‘Improving Trajectory’ “We are on a gradually improving trajectory for the economy as a whole, as well as the broad health of the financial market, which is what the Fed is hoping to see and that seems to be coming to fruition,” said Chris Molumphy , who oversees more than $180 billion as chief investment officer for fixed income at San Mateo, California-based Franklin Templeton. Employers cut payrolls by 11,000 jobs in November, the fewest in 23 months, and the unemployment rate fell to 10 percent from 10.2 percent. The economy has lost 7.2 million jobs since the recession began in December 2007. Bernanke said in a Dec. 3 speech that the economy still faces “formidable headwinds” in the form of tight credit and a weak labor market. Each of the last three recessions has seen a slow recovery in employment, though the jobless rate is higher now than at the end of the previous two slumps. The unemployment rate continued to rise past the November 2001 trough in economic activity, peaking at 6.3 percent in June of 2003. The prior recession ended in March of 1991, and unemployment continued to rise until peaking in June 1992 at 7.8 percent. Consumer Spending Consumer spending , which fell the most since 1980 during the recession, rose to $9.25 trillion on an annual basis in the third quarter. Purchases were still below the pre-recession peak of $9.36 trillion in the fourth quarter of 2007. By contrast, consumption grew every quarter of the March to November 2001 recession. In the 1990 slump, which began in the third quarter of that year, consumption surpassed the pre- recession peak in the third quarter of 1991. The downturn ended in the first quarter of that year. General Electric Co. is ready to go “back on offense” next year after slimming its portfolio and maneuvering through the worst of the finance arm’s challenges, Chief Executive Officer Jeffrey Immelt said during his annual investor meeting in New York yesterday. Sales Improve Caterpillar Inc., the world’s largest maker of bulldozers and excavators, aims to bring back some laid-off workers next year as sales improve, Chief Executive Officer Jim Owens said in a Bloomberg TV interview on Dec. 11. The company cut about 18,700 full-time jobs since Dec. 2008 as the global recession eroded demand. Fed officials said last month the economy will grow 2.5 to 3.5 percent next year, fast enough to bring the unemployment rate down only to 9.3 to 9.7 percent in the fourth quarter, according to their central tendency estimates. Factories in the U.S. made more goods in November than anticipated, extending a rebound in manufacturing that will give the world’s largest economy a lift into 2010. Production in November was still below the average level of the past two years. Bernanke, a 56-year-old former Princeton University professor, has focused on restoring liquidity and credit in the U.S. financial system, expanding the central bank’s balance sheet to $2.18 trillion in the process. The Standard and Poor’s 500 Index is up about 23 percent this year. The Fed’s mortgage purchases helped push rates on a 30-year fixed-rate loan to 4.71 in the week ending Dec. 3, the lowest since mortgage buyer Freddie Mac of McLean, Virginia began keeping records in 1971. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Regional Appointments Probe by Congress Would Get Geithner’s Support

December 5, 2009

By Craig Torres Dec. 5 (Bloomberg) — U.S. Treasury Secretary Timothy Geithner broke ranks with his former central bank colleagues and said he would support moves by Congress to take a look at how regional Federal Reserve bank presidents are appointed. “I think it is very appropriate, and I would be completely supportive of the Congress taking a look at that broader governance structure” of regional Fed banks , Geithner said yesterday in an interview for Bloomberg Television’s “Political Capital With Al Hunt,” airing this weekend. “You do not want to have any public institution in the position where its judgments, the judgments of their executives, are viewed through the prism of concern they are subject to influence of the financial community,” Geithner said. While that was “never the case,” he added, limiting such concerns would help protect the Fed, he said. Federal Reserve spokeswoman Michelle Smith wasn’t immediately available for comment. The Treasury Secretary commented a day after Federal Reserve Chairman Ben S. Bernanke defended the regional structure of the central bank as Congress considers the biggest overhaul of Fed powers since the 1930s. Lawmakers say private-sector banks have too much influence at the Fed, and that the regional bank presidents focus too much on inflation at the expense of job growth. ‘Incestuous Relationships’ Senate Banking Committee Chairman Christopher Dodd told Bernanke Dec. 3 that the regional Fed board structure leads to conflicts of interest and an “incestuous financial relationship” detrimental to the Fed. The remarks came at a hearing on Bernanke’s nomination to a second four-year term. Bernanke told Dodd that Fed directors are chosen from “a wide representative cross-section” of community leaders. Congress may be “overemphasizing the influence of reserve bank boards,” said Robert McTeer , former president of the Fed bank of Dallas, a city where he is now a distinguished fellow at the National Center for Policy Analysis. “They just don’t have that much power and influence.” McTeer said regional Fed bank presidents help provided an independent perspective to the Washington-based Board of Governors. “The beauty of the Fed is that it is not just another Washington institution,” McTeer said. “It has this regional presence.” Under a draft bill released Nov. 10 by Dodd, each regional Fed board chairman would be subject to White House appointment and Senate approval. House Democrats have called for an exploration of how the Fed is governed. Board of Governors “I doubt very much that by a year from now Fed presidents are going to have as big a role as they now have,” Financial Services Committee Chairman Barney Frank told reporters after a Nov. 17 vote in favor of limiting some of the regional Fed bank officials’ powers to participate in decisions by the Washington- based Board of Governors. Frank said the presidents are “private citizens” who shouldn’t have “governmental powers.” St. Louis Fed President James Bullard said last month that subjecting the presidents to Senate confirmation would be a “blatant politicization” of the institution. Richmond Fed President Jeffrey Lacker said Nov. 17 that the mix of private and public influence has “helped us keep focused on long-run objectives.” “I wouldn’t want to see the reserve bank governance mechanism politicized in any way,” Lacker, 54, told reporters after a speech. Asked if Dodd’s plan would politicize the process, Lacker said: “I think it could.” The presidents of Richmond, St. Louis or any other Fed bank haven’t had the interactions with the largest financial institutions as did Geithner, who served as president of the Fed Bank of New York starting in November 2003. Organized Rescues During his tenure at the New York Fed, Geithner and Bernanke helped organize rescues of Bear Stearns Cos. and American International Group Inc. using emergency lending powers that have prompted additional congressional scrutiny of the Fed. The Fed assistance to AIG “transferred tens of billions of dollars of cash” to AIG counterparties, paying creditors in full, a November report from the Office of the Special Inspector General for the Troubled Asset Relief Program said. Geithner was confirmed as Treasury secretary by the Senate in January. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

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Bernanke Defends Fed in Senate, Vows `Careful Analysis’ of Stimulus Exit

December 3, 2009

By Craig Torres Dec. 3 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke defended the central bank’s response to the global crisis and told a Senate panel considering his nomination to a second term that a retreat from record-low interest rates “will require careful analysis and judgment.” “We must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recover,” Bernanke, 55, told the Senate Banking Committee today. “My colleagues on the Federal Open Market Committee and I are committed to implementing our exit strategy in a manner that both supports job creation and fosters continued price stability.” Bernanke, who led the most expansive use of the Fed’s powers in its 96-year history, defended the central bank’s policies and made a case for its bank oversight authority, its regional structure and its independence. Many lawmakers have blamed the Fed for failing to curtail the excesses that led to the financial crisis and then overstepping its powers with bailouts of firms including New York-based insurer American International Group Inc . A Senate proposal would remove the Fed’s authority to supervise banks, and legislation pending in both chambers would limit the central bank’s ability to lend to troubled institutions and remove its rule-writing authority on consumer financial products. The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul , a Republican from Texas. The legislation had more than 300 co-sponsors and is supported by the AFL-CIO. ‘Political Pressure’ “The Congress created that exemption to protect monetary policy from short-term political pressures,” Bernanke said today. Bernanke said the Fed’s credit policies helped finance 3.3 million loans to households, more than 100 million credit-card accounts, 480,000 loans to small businesses and 100,000 to larger businesses. “Yet our task is far from complete,” he told the Senate panel. “Far too many Americans are without jobs, and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues.” The economy expanded at a 2.8 percent annual rate in the third quarter, and financial markets have recovered, with the Standard and Poor’s 500 Index up more than 23 percent this year. Still, unemployment is forecast to remain above 10 percent when the Labor Department releases the November jobs report tomorrow. “The Federal Reserve remains committed to its mission to help restore prosperity and to stimulate job creation while preserving price stability,” Bernanke said. Regional Boards Bernanke defended the Fed’s private-sector regional boards of directors after Senator Christopher Dodd , chairman of the Banking Committee, proposed changes that would give the White House and Congress a greater say in their composition. The boards nominate each bank’s president, who votes on monetary policy. The more than 270 people who serve on the Fed’s private- sector boards of directors for its regional banks “provide valuable insights into current economic and financial conditions that statistics cannot,” Bernanke said. “The structure of the Federal Reserve ensures that our policymaking is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective.” The Fed chief didn’t specifically address Dodd’s proposal on directors in his prepared testimony. Commercial Paper The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.225 percent yesterday, down from 1.42 percent at the start of the year. The central bank is also purchasing $1.25 trillion in mortgage-backed securities, which has helped keep 30-year fixed rates on home loans below 5 percent for the past four weeks. Eight of the 12 regional Fed banks “indicated some pickup in activity or improvement in conditions,” while the other four said conditions were little changed or mixed, the central bank said yesterday in its Beige Book business survey. The labor and commercial real estate markets remained “weak,” the report said. The most controversial components of Fed’s backstops involved the Fed’s purchase of $29 billion of securities in March 2008 to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co., and loans to keep AIG from default. Inspector General The Fed assistance “transferred tens of billions of dollars of cash” to AIG counterparties, a November report from the Office of the Special Inspector General for the Troubled Asset Relief Program said. Bernanke has said he aided Wall Street to save U.S. households from a worse recession. Some Wall Street firms have thrived. Goldman Sachs Group Inc. said Oct. 15 that third-quarter profit more than tripled to $3.19 billion from a year earlier on trading gains and investments with the firm’s own money. Third- quarter earnings for JPMorgan, the second-biggest U.S. bank by assets, were $3.59 billion, the highest since the 2007 collapse of the subprime-mortgage market, the bank said Oct. 14. In contrast, the economy has lost 7.3 million jobs since the recession began in December 2007, and businesses may shed another 125,000 in November, according to economists surveyed by Bloomberg News. The unemployment rate is forecast to match October’s 26-year high of 10.2 percent. The Fed chairman is overhauling the way the Fed conducts bank inspections, reinforcing individual bank examiners with modeling by Fed Board staff designed to identify risks across the financial system. “Heeding the lessons of the crisis, we are committed to taking a more proactive and comprehensive approach to oversight to ensure that emerging problems are identified early and met with prompt and effective supervisory responses,” he said. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ;

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Bernanke Defends Fed in Senate, Vows `Careful Analysis’ of Stimulus Exit

December 3, 2009

By Craig Torres Dec. 3 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke defended the central bank’s response to the global crisis and told a Senate panel considering his nomination to a second term that a retreat from record-low interest rates “will require careful analysis and judgment.” “We must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recover,” Bernanke, 55, told the Senate Banking Committee today. “My colleagues on the Federal Open Market Committee and I are committed to implementing our exit strategy in a manner that both supports job creation and fosters continued price stability.” Bernanke, who led the most expansive use of the Fed’s powers in its 96-year history, defended the central bank’s policies and made a case for its bank oversight authority, its regional structure and its independence. Many lawmakers have blamed the Fed for failing to curtail the excesses that led to the financial crisis and then overstepping its powers with bailouts of firms including New York-based insurer American International Group Inc . A Senate proposal would remove the Fed’s authority to supervise banks, and legislation pending in both chambers would limit the central bank’s ability to lend to troubled institutions and remove its rule-writing authority on consumer financial products. The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul , a Republican from Texas. The legislation had more than 300 co-sponsors and is supported by the AFL-CIO. ‘Political Pressure’ “The Congress created that exemption to protect monetary policy from short-term political pressures,” Bernanke said today. Bernanke said the Fed’s credit policies helped finance 3.3 million loans to households, more than 100 million credit-card accounts, 480,000 loans to small businesses and 100,000 to larger businesses. “Yet our task is far from complete,” he told the Senate panel. “Far too many Americans are without jobs, and unemployment could remain high for some time even if, as we anticipate, moderate economic growth continues.” The economy expanded at a 2.8 percent annual rate in the third quarter, and financial markets have recovered, with the Standard and Poor’s 500 Index up more than 23 percent this year. Still, unemployment is forecast to remain above 10 percent when the Labor Department releases the November jobs report tomorrow. “The Federal Reserve remains committed to its mission to help restore prosperity and to stimulate job creation while preserving price stability,” Bernanke said. Regional Boards Bernanke defended the Fed’s private-sector regional boards of directors after Senator Christopher Dodd , chairman of the Banking Committee, proposed changes that would give the White House and Congress a greater say in their composition. The boards nominate each bank’s president, who votes on monetary policy. The more than 270 people who serve on the Fed’s private- sector boards of directors for its regional banks “provide valuable insights into current economic and financial conditions that statistics cannot,” Bernanke said. “The structure of the Federal Reserve ensures that our policymaking is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective.” The Fed chief didn’t specifically address Dodd’s proposal on directors in his prepared testimony. Commercial Paper The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.225 percent yesterday, down from 1.42 percent at the start of the year. The central bank is also purchasing $1.25 trillion in mortgage-backed securities, which has helped keep 30-year fixed rates on home loans below 5 percent for the past four weeks. Eight of the 12 regional Fed banks “indicated some pickup in activity or improvement in conditions,” while the other four said conditions were little changed or mixed, the central bank said yesterday in its Beige Book business survey. The labor and commercial real estate markets remained “weak,” the report said. The most controversial components of Fed’s backstops involved the Fed’s purchase of $29 billion of securities in March 2008 to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co., and loans to keep AIG from default. Inspector General The Fed assistance “transferred tens of billions of dollars of cash” to AIG counterparties, a November report from the Office of the Special Inspector General for the Troubled Asset Relief Program said. Bernanke has said he aided Wall Street to save U.S. households from a worse recession. Some Wall Street firms have thrived. Goldman Sachs Group Inc. said Oct. 15 that third-quarter profit more than tripled to $3.19 billion from a year earlier on trading gains and investments with the firm’s own money. Third- quarter earnings for JPMorgan, the second-biggest U.S. bank by assets, were $3.59 billion, the highest since the 2007 collapse of the subprime-mortgage market, the bank said Oct. 14. In contrast, the economy has lost 7.3 million jobs since the recession began in December 2007, and businesses may shed another 125,000 in November, according to economists surveyed by Bloomberg News. The unemployment rate is forecast to match October’s 26-year high of 10.2 percent. The Fed chairman is overhauling the way the Fed conducts bank inspections, reinforcing individual bank examiners with modeling by Fed Board staff designed to identify risks across the financial system. “Heeding the lessons of the crisis, we are committed to taking a more proactive and comprehensive approach to oversight to ensure that emerging problems are identified early and met with prompt and effective supervisory responses,” he said. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ;

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Bernanke to Defend Fed at Hearing as Lawmakers Seek to Curtail Its Powers

December 3, 2009

By Craig Torres and Alison Vekshin

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Fed Minutes Show Officials Said Low Rates May Fuel `Excessive’ Speculation

November 24, 2009

By Craig Torres Nov. 24 (Bloomberg) — Federal Reserve officials said record-low interest rates might fuel “excessive” speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today. “Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” minutes of the Nov. 3-4 meeting said, “including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations.” While policy makers agreed that the chances of such effects were “relatively low, they would remain alert to these risks,” the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline. Gold prices touched an all-time high of $1,174 an ounce in New York yesterday as a slumping dollar boosted the appeal of alternative assets. The Standard & Poor’s 500 index has jumped 63 percent since its 2009 low on March 9, and the U.S. auctioned $44 billion of two-year debt yesterday at a yield of 0.802 percent, the lowest ever. “They are walking the fine line,” said Alan Levenson , chief economist at T. Rowe Price Group Inc., in a Bloomberg Television interview. “They like the asset inflation now for what it does for consumers’ pocket books and ability to spend.” They need to prevent higher spending from fueling a rise in prices, he said. Speculative Capital Financial officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery. “Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year,” the minutes said. “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.” The dollar weakened to the lowest level versus the yen in a month after the minutes were released. The dollar fell 0.5 percent to 88.56 yen at 3:21 p.m. in New York from 88.97 yesterday, after touching 88.36, the lowest level since Oct. 9. Less Than Estimated A report today showed the U.S. economy grew less than initially estimated last quarter as consumer spending trailed forecasts. The economy expanded at a 2.8 percent annual rate in the third quarter, less than the initial estimate of a 3.5 percent pace of expansion, the Commerce Department report showed. “Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” the minutes said. Policy makers debated the usefulness of selling assets as part of the so-called exit strategy from the unprecedented expansion of credit to help reduce the central bank’s balance sheet and reserves held by commercial banks. Several officials said asset sales “could be a useful tool” and “reinforce the effectiveness” of paying interest on reserves held at the Fed by commercial banks. Other policy makers “had reservations about asset sales,” especially before any decision to raise interest rates, and said such sales may increase longer-term rates, the minutes said. Trimmed Forecasts Fed officials trimmed their forecasts for the U.S. jobless rate in 2010 and 2011, the minutes showed. Fed governors and regional bank presidents predicted the jobless rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from their June projection of 9.5 percent to 9.8 percent. The financial crisis has eased in recent months for banks and large corporations, which have issued a record $1.171 trillion in bonds this year, according to Bloomberg data. The cost of three month loans in dollars between banks was 0.261 percent today, according to the British Bankers Association. That’s down from 1.41 percent at the start of the year. While large companies are taking advantage of the Fed’s low interest-rate policy in capital markets, consumers face tighter terms and less available credit. Consumer loans held by commercial banks in the U.S. fell to $846.7 billion in October, down 0.7 percent from the same month a year earlier. ‘Tight Conditions’ “Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms,” the minutes said. The Fed’s mandate for “maximum employment” remains challenged as businesses continue to reorganize and fire staff. The U.S. economy has lost 7.3 million jobs since the recession began in December 2007. The unemployment rate last month rose to a 26-year high of 10.2 percent. U.S. payrolls shrank by 190,000 jobs last month, and the average workweek held at a record low. To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Will Cut Maximum Maturity of Discount Window Loans to 28 Days From 90

November 17, 2009

By Craig Torres Nov. 17 (Bloomberg) — The Federal Reserve will reduce the maximum maturity on discount window loans to 28 days from 90 days in January, the Board of Governors announced today. “In light of the continued improvement in financial market conditions, the Federal Reserve Board on Tuesday announced that it approved a reduction in the maximum maturity of primary credit loans at the discount window for depository institutions to 28 days from 90 days effective January 14, 2010,” the Fed Board said in a press release. “Primary credit loans will remain eligible for renewal upon request of the borrower.” The discount window was one of the first tools that Fed Chairman Ben S. Bernanke deployed to ease up financing conditions in the bank funding market as the credit crisis began to unfold. U.S. central bankers are gradually scaling back some of their lending programs as demand wanes with improving financial markets. Banks typically resorted to the discount window to smooth out overnight funding shortfalls. In August 2007, the Fed Board extended the maturity of discount window loans to 30 days, and then to 90 days in March 2008 to boost liquidity in inter-bank funding markets after the near-collapse of Bear Stearns Cos. that month. The Wall Street brokerage firm merged with JPMorgan Chase & Co. with Fed assistance. For Related News and Information: Federal Reserve links: FED Credit crunch page: WWCC Fed balance-sheet figures: ALLX FARW Government relief programs: GGRP Fed monetary policy: FOMC Fed Web links: FRBM Central bank rates worldwide: CBRT

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Fed Faces Biggest Blow to Authority, Independence in Dodd Banking Measure

November 11, 2009

By Scott Lanman and Craig Torres

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Fed Retains Its Pledge to Keep Interest Rates Down for `Extended Period’

November 4, 2009

By Craig Torres Nov. 4 (Bloomberg) — The Federal Reserve restated its intention to keep interest rates “exceptionally low” for “an extended period” as long as inflation expectations are stable and unemployment fails to decline. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today. “Household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” the FOMC said after meeting in Washington. Chairman Ben S. Bernanke is trying to determine when the recovery is strong enough to withdraw the $1 trillion the Fed injected to avert a depression. While gross domestic product rose for the first time in a year during the third quarter, figures this week are forecast to show payrolls fell further in October. Johnson & Johnson , the world’s largest health-products company, said yesterday it will fire more than 7,000 people. Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December. The conditions they cited to keep it there are “low rates of resource utilization, subdued inflation trends, and stable inflation expectations,” the Fed said. The Standard & Poor’s 500 rose 0.5 percent to 1,050.22 at 3:45 p.m. in New York. Treasuries fell for a third day, with the 10-year note yield increasing six basis points, or 0.06 percentage point, to 3.522 percent in New York, according to BGCantor Market Data. Inflation Discussing inflation, the central bank said: “With substantial resource slack likely to continue to dampen cost pressures and with longer term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.” The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year. “The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion is consistent with the recent path of purchases and reflects the limited availability of agency debt,” the statement said. The decision was unanimous. Fiscal Stimulus Record-low interest rates and Fed purchases of Treasuries and mortgage debt, combined with the Obama administration’s $787 billion fiscal stimulus, helped boost gross domestic product 3.5 percent from July to September. Without the auto industry, which benefited from the government’s “cash for clunkers” program, growth would have been 1.9 percent. “We are in recovery, the outlook has improved, but they aren’t ready to sound the all clear,” Julia Coronado , senior U.S. economist at BNP Paribas SA in New York, said before the announcement. “You still have a fractured banking sector and credit is still contracting.” Stocks and commodities have rallied as a stronger global economy encourages investors to take greater risks. The S&P 500 Index is up about 17 percent this year and crude oil prices are 80 percent higher. Gold has advanced 23 percent and touched a record of $1,096.20 an ounce in New York today. Policy makers are “trying to add some sort of conditionality to their ability to include or exclude the ‘extended period’ language,” said Alan Ruskin , head of currency strategy at RBS Securities Inc. in Stamford, Connecticut. ‘Strong Signal’ The ebb of the global crisis that caused $1.7 trillion in credit losses and writedowns has already helped spur central banks from Australia to Norway to start increasing borrowing costs. Today’s statement indicates the Fed isn’t yet ready to follow some of their counterparts abroad. While the return to growth has aided companies including Ford Motor Co., it has yet to pay off in jobs, with employers squeezing higher output from a smaller labor pool. Ford, the only major U.S. automaker to avoid bankruptcy, beat forecasts and posted third-quarter net income of $997 million Nov. 2, its first operating profit since early 2008 on smaller discounts and higher sales. Cut Costs New Brunswick, New Jersey-based Johnson & Johnson said Nov. 3 it will shrink its 117,000-member workforce by 6 percent to 7 percent as it tries to cut costs and invest in more profitable areas of its business. Jabil Circuit Inc ., a Florida-based electronics manufacturer whose customers include Nokia Oyj , said Sept. 29 it plans to cut an additional 1,500 positions. “If employment losses don’t get down to a small level, we won’t have income growth to support consumer spending,” Kurt Karl , chief U.S. economist at Swiss RE Financial Products in New York, said before today’s Fed announcement. The Labor Department on Nov. 6 will report that the unemployment rate rose to 9.9 percent in October, from 9.8 percent the previous month, as companies cut another 175,000 jobs, according to the median forecasts in Bloomberg News surveys of economists. More Americans filed bankruptcy in October than any month since changes to bankruptcy laws in 2005. “With unemployment hanging around 9 percent, I don’t think there is much reason to raise rates,” Ian Morris , chief U.S. economist at HSBC Securities USA Inc. in New York, said before the decision. “You need about 2.5 to 3 percent GDP growth just to keep the unemployment rate stable around 10 percent.” Not Until August The Fed is unlikely to change interest rates until August of 2010, according to the median projection of 47 economists surveyed by Bloomberg News in October. While the central bank’s stance is providing a bonanza for large companies that can issue debt in the capital markets, small and mid-size firms and homeowners are still struggling with tight bank lending standards. Corporate borrowers have sold more than $1 trillion of U.S. bonds so far in 2009, the fastest pace on record. Sales compare with $874 billion in all of 2008, and $1.17 trillion for 2007, the biggest year for bond sales. Commercial and industrial bank loans are down 6 percent from June to Sept. Real-estate lending is down 2.3 percent over the same period, and U.S. consumer credit fell in August for a seventh straight month, according to Fed data. “Credit availability is still challenging,” Anthony Crescenzi , senior vice president at Pacific Investment Management Co. in Newport Beach, California, said before the announcement. “For Fed policy, it means steady as she goes.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Fed Retains Its Pledge to Keep Interest Rates Low for an `Extended Period’

November 4, 2009

By Craig Torres Nov. 4 (Bloomberg) — The Federal Reserve restated its intention to keep interest rates “exceptionally low” for “an extended period” and said the U.S. economy is picking up. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today after meeting in Washington. “Activity in the housing sector has increased over recent months.” Chairman Ben S. Bernanke is trying to determine when the recovery is strong enough to withdraw the $1 trillion the Fed injected to avert a depression. While gross domestic product rose for the first time in a year during the third quarter, figures this week are forecast to show payrolls fell further in October. Johnson & Johnson , the world’s largest health-products company, said yesterday it will fire more than 7,000 people. Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December. “With substantial resource slack likely to continue to dampen cost pressures and with longer term inflation expectations stable, the Committee expects that inflation will remain subdued for some time,” the statement said. The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year. Agency Purchases “The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion is consistent with the recent path of purchases and reflects the limited availability of agency debt,” the statement said. The Fed said “household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.” Policy makers added that companies “continue to make progress in bringing inventory stocks into better alignment with sales.” The decision was unanimous. Record-low interest rates and Fed purchases of Treasuries and mortgage debt, combined with the Obama administration’s $787 billion fiscal stimulus, helped boost gross domestic product 3.5 percent from July to September. Without the auto industry, which benefited from the government’s “cash for clunkers” program, growth would have been 1.9 percent. “We are in recovery, the outlook has improved, but they aren’t ready to sound the all clear,” Julia Coronado , senior U.S. economist at BNP Paribas SA in New York, said before the announcement. “You still have a fractured banking sector and credit is still contracting.” Greater Risk Stocks and commodities have rallied as a stronger global economy encourages investors to take greater risks. The Standard and Poor’s 500 Index is up about 17 percent this year and crude oil prices are 80 percent higher. Gold has advanced 23 percent and touched a record of $1,096.20 an ounce in New York today. The ebb of the global crisis that caused $1.7 trillion in credit losses and writedowns has already helped spur central banks from Australia to Norway to start increasing borrowing costs. Today’s statement indicates the Fed isn’t yet ready to follow some of their counterparts abroad. Job Losses While the return to growth has aided companies including Ford Motor Co., it has yet to pay off in jobs, with employers squeezing higher output from a smaller labor pool. Ford, the only major U.S. automaker to avoid bankruptcy, beat forecasts and posted third-quarter net income of $997 million Nov. 2, its first operating profit since early 2008 on smaller discounts and higher sales. New Brunswick, New Jersey-based Johnson & Johnson said Nov. 3 it will shrink its 117,000-member workforce by 6 percent to 7 percent as it tries to cut costs and invest in more profitable areas of its business. Jabil Circuit Inc ., a Florida-based electronics manufacturer whose customers include Nokia Oyj , said Sept. 29 it plans to cut an additional 1,500 positions. “If employment losses don’t get down to a small level, we won’t have income growth to support consumer spending,” Kurt Karl , chief U.S. economist at Swiss RE Financial Products in New York, said before today’s Fed announcement. Job Losses Mount The Labor Department on Nov. 6 will report that the unemployment rate rose to 9.9 percent in October, from 9.8 percent the previous month, as companies cut another 175,000 jobs, according to the median forecasts in Bloomberg News surveys of economists. More Americans filed bankruptcy in October than any month since changes to bankruptcy laws in 2005. “With unemployment hanging around 9 percent, I don’t think there is much reason to raise rates,” Ian Morris , chief U.S. economist at HSBC Securities USA Inc. in New York, said before the decision. “You need about 2.5 to 3 percent GDP growth just to keep the unemployment rate stable around 10 percent.” The Fed is unlikely to change interest rates until August of 2010, according to the median projection of 47 economists surveyed by Bloomberg News in October. While the central bank’s stance is providing a bonanza for large companies that can issue debt in the capital markets, small and mid-size firms and homeowners are still struggling with tight bank lending standards. Corporate borrowers have sold more than $1 trillion of U.S. bonds so far in 2009, the fastest pace on record. Sales compare with $874 billion in all of 2008, and $1.17 trillion for 2007, the biggest year for bond sales. Commercial and industrial bank loans are down 6 percent from June to Sept. Real-estate lending is down 2.3 percent over the same period, and U.S. consumer credit fell in August for a seventh straight month, according to Fed data. “Credit availability is still challenging,” Anthony Crescenzi , senior vice president at Pacific Investment Management Co. in Newport Beach, California, said before the announcement. “For Fed policy, it means steady as she goes.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Bernanke Says Financial Industry Should Bear Cost to Shut Firms, Not U.S.

October 23, 2009

By Craig Torres and Steve Matthews Oct. 23 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke called on Congress to ensure that the costs of closing down large financial institutions are borne by the industry, not taxpayers. The Fed chairman called for a “credible process” for imposing losses on the shareholders and creditors, saying “any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers.” Bernanke’s remarks coincide with central bank efforts to step up supervision of banks and crack down on compensation practices that fuel excessive risk-taking. As Congress considers the biggest overhaul of financial regulation since the 1930s, Bernanke said it’s “critical” for lawmakers to close regulatory gaps and provide supervisors with the tools to manage risks throughout the financial system. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Steve Matthews in Atlanta at 1310 or smatthews@bloomberg.net .

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Fed Weighed Extending End-Date for Mortgage-Bond Purchases at Last Meeting

September 2, 2009

By Craig Torres Sept. 2 (Bloomberg) — Federal Reserve officials in their August meeting discussed extending the end-date for purchases of mortgage bonds to minimize any market disruptions, and expressed concern about the pace of a likely economic recovery. A number of policy makers judged that a “tapering of agency debt and MBS purchases could be helpful in the future as those programs approach completion,” the Fed said in minutes of the Federal Open Market Committee’s Aug. 11-12 meeting released today in Washington. The central bank boosted its mortgage- backed securities and agency-debt programs in March and they are currently scheduled to end in December. Officials have indicated differences on when to begin withdrawing their record monetary stimulus as signs emerge that the recession has ended. Two district-bank chiefs last week said the Fed may not need to complete its purchases of mortgage securities; New York Fed President William Dudley by contrast stressed an exit is “premature” given elevated unemployment. “Most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks,” the Fed said in today’s minutes. “Labor market conditions remained of particular concern to meeting participants.” The FOMC, which extended the end-date for Treasuries purchases by a month at the August meeting, made no decision at the time on programs for mortgage-backed securities and agency debt. ‘Still Fragile’ “These programs will be phased out as the economic recovery picks up steam,” predicted Christopher Rupkey , chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The economy even in recovery is still fragile, so the exit strategy is likely to proceed cautiously.” Stocks were little changed after the minutes were released, with the Standard and Poor’s 500 Index at 998.55 at 3:34 p.m. in New York. U.S. Treasury securities remained higher, with yields on benchmark 10-year notes at 3.29 percent. The Fed is purchasing $1.25 trillion of agency mortgage- backed securities and $200 billion of agency debt. Officials last month also discussed including adjustable-rate mortgages in their purchases, today’s minutes showed. The Fed announced in November that it would begin purchasing housing agency debt and mortgage-backed securities backed by Fannie Mae , Freddie Mac and Ginnie Mae to “reduce the cost and increase the availability of credit for the purchase of houses.” Rising Delinquency Rates Banks are reluctant to hold housing debt or originate new loans as default and delinquency rates rise. Some 9.24 percent of U.S. mortgages were delinquent in the second quarter, compared with 9.12 in the first quarter. By using its balance sheet to purchase securitized housing debt, the Fed provided a bigger market for banks that wanted to sell off their loans. The average rate on a 30-year fixed mortgage fell to a low this year of 4.78 percent on April 30, down from 5.97 percent when the Fed announced the program Nov. 25, according to Freddie Mac. The average rate stood at 5.14 percent at the end of August. “Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce the unusually large spreads between ARM rates and yields on similar-duration Treasury securities — spreads that were far larger than the comparable spreads on fixed-rate mortgages,” the minutes said. “Others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment.” ‘Leveling Out’ The FOMC said in its statement last month that “economic activity is leveling out” and “conditions in financial markets have improved further.” Central bankers next meet Sept. 22 and 23. Fed staff analysis resulted in a forecast unchanged at the August meeting from the June meeting, the minutes said. The Fed staff forecast for inflation was also about unchanged from June. Fed Chairman Ben S. Bernanke , 55, was nominated to a second term by President Barack Obama last month after overseeing a record expansion of the central bank’s balance sheet in his campaign to prevent a second depression. Seeking to unclog credit markets and revive growth, the Fed has loaned to banks, provided backstop financing for the commercial paper and asset- backed securities markets and pumped money into the banking system through direct purchases of securities. Exit Strategy The minutes showed Fed staff continued to refine the tools of their exit strategy. Among the options they discussed were large-scale reverse repurchase agreements, “potentially with counterparties other than the primary dealers,” the minutes said. The staff also discussed setting up a term deposit facility to reduce the supply of banks’ excess reserves. Fed district-bank presidents Jeffrey Lacker of Richmond and James Bullard of St. Louis said last week the Fed may not need to buy the full $1.25 trillion in mortgage-backed securities the central bank has authorized by year-end. Lacker, a voting member of the FOMC, said in an Aug. 27 speech he will be “evaluating carefully whether we need or want the additional stimulus.” Bullard, a voting member of the Fed panel next year, told reporters after a speech the same day that purchasing the full amount “might not be necessary.” Manufacturing Recovery Economic reports in recent weeks indicated that while the recession may have ended, risks to growth remain. Manufacturing expanded for the first time in 19 months in August, the same month when the unemployment rate likely rose to 9.5 percent, threatening to restrain consumer spending and slow a recovery. “Several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans,” the minutes said. The Institute for Supply Management’s factory gauge increased to 52.9 in August for the biggest two-month gain since 1983; 50 is the dividing line between expansion and contraction. “The production recession is over, the GDP recession is over — the employment recession is not,” Brian Bethune , economist at IHS Global Insight, said yesterday. “The Fed is in a good position right now. It can hold rates low and steady.” Forecasters expect the Labor Department’s August employment report on Sept. 4 to show the jobless rate climbing to 9.5 percent last month from 9.4 percent in July, according to a Bloomberg News survey. The Fed’s preferred measure of inflation, the personal consumption expenditures price index minus food and energy, rose 1.4 percent for the 12 months ending July. Most Fed officials had an outlook for “subdued and potentially declining wage and price inflation over the next few years,” the minutes said. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

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Bernanke Says Consumer Protection Should Be Made Formal Policy Goal of Fed

July 22, 2009

By Craig Torres July 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said consumer protection should be added to the Federal Reserve Act as a formal policy goal along with low inflation and full employment. “We were not quick enough, we were not aggressive enough to address consumer issues earlier in this decade,” Bernanke, 55, said in response to a question from Christopher Dodd , the Connecticut Democrat who chairs the Senate Banking Committee.

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