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  • FOMC Meeting Response

    The Federal Reserve decided yesterday to leave the federal funds target rate unchanged at 0-0.25%, citing the slowness of the economy's growth and stable longer term inflation expectations . The Fed will also sell some short term Treasuries, and in return buy some longer term Treasuries. While there were calls for more action from the Fed, Tim Duy called the Fed' stance "bold." Bottom Line: I think Fed official believe they are being bold; I see them as continuing to ease policy in 25bp increments. Expect that to continue. Assuming the economy fails to regain momentum, the Fed will follow up with additional action – QE3 will be the next stop. Ignore the dissents; they are background noise. Don’t expect miracles; expect small moves, the equivalent of 15bp here, 25bp there. The real leverage could potentially come from fiscal policy leveraging the easy monetary policy. Print the money and spend it. Open up the refinancing channel. Overall, make the objective of national economic policy simply be to decisively move us off the zero bound. Not deficits, not the dual mandate, just commit to pulling us off the bottom. Read Duy's Fed Watch response to the FOMC meeting here . For more analysis of the announcement and possible response today on Wall Street and in Washington, here's the Wall Street Journal's Evan Newmark , Jon Hilsenrath , and Thorold Barker :

  • FCIC Report Calls Economic Crisis an 'Avoidable Disaster'

    It looks like the New York Times managed to acquire an early copy of the Financial Crisis Inquiry Commission 's report. Sewell Chan summarizes the report's conclusions, in today's Times, writing that the crisis " was an 'avoidable' disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street." Acoording to Chan, the FCIC had trouble coming to a bipartisan consensus, with Republican members "focusing on a narrower set of causes" than the commission as a whole. We can expect to see a lot of detailed blame for certain government officials in the full report, which is scheduled to come out as a book tomorrow. Chan: The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence. It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.” Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes. Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.” Read the full article here .

  • Reactions to Fed's Quantitative Easing Efforts

    The Federal Open Market Committee announced yesterday that it has begun another round of quantitiative easing . Though they did not use that term. From the announcement: To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. There has been a lot of public discussion among economists over whether this monetary policy measure is the right move. Karen Dynan , Vice President and Co-Director, Economic Studies at the Brookings Institution , thinks it is, pointing to inflation being below the Fed's target and unemployment being, in a word, "weak": For more of Dynan's analysis, click here . Meanwhile, writing in the Financial Times , Martin Feldstein calls the policy a "dangerous gamble": Mr Bernanke’s argument for QE is based on the “portfolio balance” theory which stresses that, when the Fed buys bonds, investors increase their demand for other assets, particularly equities, raising their price and increasing household wealth and spending. Equity prices have already risen by 10 per cent since Mr Bernanke discussed this approach. But how much further will equity prices rise and what will that do to GDP? Neither theory nor past experience can answer the first question. Much of the share price increase induced by QE may already have occurred based on expectations. An optimistic guess would be another 10 per cent. Since households have about $7,000bn in equities, that would imply a wealth gain of $700bn, raising consumer spending by about one-quarter of one per cent of GDP, a welcome but trivially small effect on incomes and employment. The other ways in which QE would raise GDP are also small. A 20-basis-point reduction in mortgage rates would have little effect on homebuying at a time when house prices are again falling. The increase in banks’ liquidity would do nothing since banks already have massive excess reserves. Big corporations are sitting on vast amounts of cash. Small businesses that are not spending because they cannot get credit will not be helped, because the banks on which they depend have a shortage of capital. Read Feldstein's op-ed here .

  • The Fed and the (Near?) Future of Interest Rates

    Yesterday the Federal Reserve's Board of Governors decided in their last policy meeting of the year to keep the target range for federal funds--aka, the benchmark interest rate--between 0 and 1/4 percent. Their reasoning, at least publicly, appears to be based on both good news and bad news. The good news: things are picking up (so Fed action, their reasoning seems to be, has been the right action). The bad news: things aren't picking up very fast (so we need more of the same Fed action). From the Fed Board of Governors' release: Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. 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. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. 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. Read the Fed's full release here . Not much of a surprise in the Fed's decision, but how long before interest rates start to climb? Dennis Berman , the Wall Street Journal's money and investing editor, and Dave Callaway , editor-in-chief at MarketWatch , weigh in on the Fed's statement yesterday and the near future of interest rates at the Journal's News Hub:

  • Treasury Sec Calls for Regulatory Power Over Financial Firms like AIG

    Treasury Sec. Geithner and Fed Chair Bernanke are on Capitol Hill today, testifying before the House Financial Services Committee about the bailout of AIG. They are asking Congress for new regulatory power over non-bank financial insitutions like AIG. Bernanke, while defending the decision to bailout AIG last fall, said that if the federal government had more regulatory power at the time, "the outcome would have been far preferable to the situation we find ourselves in now" (from New York Times article: Treasury Chief Seeks Wider Power to Seize Troubled Firms ). Here's Sec. Geithner:

  • WSJ March Forecast: Failing Grades and Little Optimism

    Economists polled in the March Wall Street Journal Forecasting Survey "see a nearly one-in-six chance that the US will fall into a depression." And they have pushed back their projection of when the current recession will end. In last month's survey, the magic month was August, now it is October, and only 13% of economists project the end to come before the third quarter of 2009: The forecast also shows unemployment climbing through the rest of 2009, with economists predicting another 2.8 million jobs lost. Overall, the 49 economists surveyed for the forecast are not happy with the Obama Administration. 42% of respondents gave President Obama grades below 60 on a 0-100 scale. Treasury Secretary Geithner scored a 51 average. The Journal's Phil Izzo and Kelly Evans share the grades in this video: You can access all of the March Forecast's data in useful multimedia charts here .

  • Bernanke Defends Fed's Actions

    There has been plenty of bad news in recent days, from markets tumbling to scary figures about "underwater" mortgages , but Federal Reserve Chair Ben Bernanke says things would be worse if not for the Fed's actions over the last six months: The measures taken since September by the Federal Reserve, other U.S. government entities, and foreign governments have helped improve conditions in some financial markets. In particular, strains in short-term funding markets have eased notably since last fall, and London interbank offered rates, or Libor--which influence the interest rates faced by many U.S. households and businesses--have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds in September have been replaced by modest inflows. In the market for conforming mortgages, interest rates have fallen nearly 1 percentage point since the announcement of our intention to purchase agency debt and agency mortgage-backed securities. Corporate risk spreads have also declined somewhat from extraordinarily high levels, although bond spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat more recently. Nevertheless, significant stresses persist in many markets. For example, most securitization markets remain closed, and some financial institutions remain under pressure. That is from Bernanke's testimony before the Senate Budget Committee yesterday. Here is his full opening statment: You can read a transcript of Bernanke's testimony here .

  • Economy Day--In Pictures

    The New York Times counted President Obama saying "economy" thirty times in his address to Congress. And that was just one chapter in a day of economic talk in Washington. Earlier, Ben Bernanke , chair of the Federal Reserve, addressed the Senate Banking Committee and said, if the government makes the right moves, economic recovery could be just a year away. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit. Here is his opening statement from yesterday: A transcript of Bernanke's testimony is here . President Obama was up in prime time, and it certainly didn't hurt to have stocks rally in the afternoon , after Bernanke's testimony. Before addressing specific details of his administration's economic recovery plans, the President said it is time for the country to "take charge of our future." Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight. Here is an excerpt from his speech: You can watch the full address here. Before the day was up, the Republicans sent Louisiana Governor Bobby Jindal to the podium (at the Governor's Mansion in Baton Rouge) to respond to Obama's address. Jindal stressed his party's belief that "the way to lead is by empowering you, the American people." That is why Republicans put forward plans to create jobs by lowering income tax rates for working families, cutting taxes for small businesses, strengthening incentives for businesses to invest in new equipment and hire new workers, and stabilizing home values by creating a new tax credit for home-buyers. These plans would cost less and create more jobs. Here's an excerpt from his response: Governor Jindal's office promises a full video of his address will be available here . You can read a full transcript from CNN here .
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  • When "Bad Banks" are a Good Thing

    In his speech yesterday at the London School of Economicsm, Fed Reserve Chair Ben Bernanke revived talk of the US government buying up so-called "toxic assets." Marketplace Senior Editor Paddy Hirsch explains Bernanke's plan at the Marketplace Whiteboard :