Fed launches QE-lite
In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.
It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.
The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.
There is an implicit commitment to continue buying securities until the end of June 2011 and to buy $600 billion in total but the figures are described as an intention, so they could be varied in response to changing conditions.
The committee preserved its flexibility by promising to “regularly review the pace of its securities purchases and the overall size of the asset-purchase program in the light of incoming information and will adjust the program as needed”.
Supporters of large-scale, open-ended asset purchases will note there is no finite end to the program. The committee pledged to continue employing all the policy tools at its disposal “as necessary to support the economic recovery and ensure that inflation, over time, is at levels consistent with its mandate”. It was the Fed’s equivalent of “all necessary means”.
Opponents will be relieved the committee has only sanctioned $600 billion so far, a relatively moderate amount. The regular review means even this could be halted early or scaled back if conditions improve or inflation and commodity prices start to accelerate too much.
Two years after Lehman, risk of financial collapse is still high
By Mark Williams The opinions expressed are his own.
Events unfolding in Europe — including Greece, Portugal, Spain, Italy, and most recently Ireland — are alarming reminders that systemic risk is the most pressing of this decade.
While it’s been two years to this day since the death of Lehman Brothers almost brought down the entire financial system, global systemic risk — the chance that a single event or series of events can collapse the world financial system – remains quite high.
In response to this threat, international banking regulators just approved higher Basel III capital requirements as a step in reducing global systemic risk. Banks with more capital are being forced to make more room to absorb losses, helping to increase economic stability. Under this tougher standard, banks need to maintain a minimum tier one (core) capital ratio of 4.5 percent, more than double the previous requirement.
As further risk mitigation, dividend and discretionary bonus payments will be restricted unless core capital ratio is 7 percent or higher. Unfortunately the phase-in period for these stronger capital standards is from 2013 to 2019. So this multi-year time gap allows for plenty of systemic risk to persist and grow.
Domestically, the Dodd-Frank Act passed in July also attempts to address systemic risk by setting up a Financial Stability Oversight Counsel (FSOC) made up of major financial firefighters like the Fed, SEC, FDIC, and the Treasury. For the first time, managing systemic risk and its impact on the economy is an official U.S. regulatory policy.
Forecasting and its discontents
“Prediction is very difficult, especially if it’s about the future,” is attributed to a long list of people. Even with that in mind, however, the first eight months of 2010 have been especially unkind to professional forecasters and investors as markets have lurched between extremes of pessimism and optimism.
Normally forecasters can benefit from diversification — publishing lots of forecasts ensures at least some prove correct. But heightened correlation between and within asset classes has denied forecasters and investors even that consolation.
Federal Reserve Chairman Ben Bernanke has complained about the “unusual uncertainty” clouding the outlook. And macro hedge funds have run into trouble, several prominent ones closing down and returning money to investors, as the big trends on which they thrive have disappeared amid volatility and sharp switchbacks.
The only clear trend has been the rush towards the safety of high-rated government bonds and corporate debt. Even that has some observers muttering darkly about irrationality and the probability of a bubble, implying a big reversal in future.
In that context, it is hardly surprising oil price predictions have come unstuck.
The median forecast for average U.S. crude oil prices in 2010 increased steadily from $74.00 per barrel in the first Reuters survey in October 2009 to $81.06 at the time of the April 2010 survey, before sliding in each of the next four months to a low of $78.63 in August. Further reductions seem likely when the next survey is published in September.
While the adjustments may not seem large, these are averages. Changes in individual predictions have been far larger in some cases.
Market should prepare for autumn rate “exit”
Could the first increases in short-term U.S. interest rates come much earlier than most forecasters expect, perhaps as soon as September or November 2010?
Past experience suggests rates begin to rise about 30-35 months after the trough in the manufacturing cycle (as measured by capacity utilisation rates).
In the last four expansions, before this one, rates started rising 27 months, 48 months, 33 months and 31 months after capacity utilization had hit its low point.
Three of these observations lie in a narrow range of 27-33 months. Rates rose after an average lag of 30 months. The fourth reflected the unusually sluggish recovery after the last deep downturn ended in January 1983. Rates did not start to rise until four years later in January 1987.
Including this very deep recession pushes up the average to 35 months. If the Fed’s behaviour follows past practice, policymakers will not begin to boost the federal funds target until the end of 2011 or even the first half of 2012. That would be around 30-35 months after the recent cyclical turning point in July 2009. It would give the economy plenty of time to reabsorb the slack created by the recession and for the expansion to prove itself self-sustaining.
But another way to look at the problem is to ask how much of the slack created by recession is re-absorbed before the central bank begins to tighten. In the last four recessions, capacity utilisation fell by 16.8 percentage points, 18.2 points, 8.2 points and 13.6 points respectively (an average of 14.2 percentage points).
The Fed announced its first rate increase when utilisation had climbed back by 11.7, 11.0, 4.0 and 4.8 percentage points respectively (for an average of 7.9 percentage points). The first rise came when about 55-60 percent of the slack created during the preceding recession had been reabsorbed.
Forget the past. The fed no longer controls lending. Savers control Lending. Shareholders control Executive Pay. A revolt is underway. Money is being pulled from banks because we won’t accept low interest rates. Proxy votes are voting control and pay away from Executives. The hardworking savers are now in control!
Locking up bank reserves is wrong policy focus
– John Kemp is a Reuters columnist. The views expressed are his own. —
Plotting an exit strategy and shrinking the Federal Reserve’s balance sheet has become a hot topic as policymakers try to underscore their commitment to price stability and markets ponder the risk of inflation.
But micro-managing the reserve base is a curiously inadequate way to respond to medium-term concerns about inflation. Interest rates (the cost of credit) and supervision (leverage) are broader, more appropriate tools.
It is irrelevant whether the Fed sells its assets back to the market. What matters is whether and when the central bank is prepared to raise the price of borrowing.
A NEW STORYLINE
Federal Reserve Chairman Ben Bernanke is expected to use his testimony to the House Financial Services Committee on Wednesday to outline plans for taking back some of the liquidity it injected during the crisis.
There is no suggestion the Fed wants to start reducing liquidity straight away. Rather the central bank hopes a credible plan for reducing it later will head off fears about inflation and keep bond rates and borrowing costs down.
The fed had better raise interest rates soon, because a there are a growing number of us with a lot of cash in the banks that are getting sick of letting everyone use our money for next to nothing in interest. What if we all withdraw it until we get better rates?? For every $1mil I have in the bank I control $10Mil in lending.
There’s no way to hedge politics
Ben Bernanke in peril and the Volcker crackdown on proprietary trading by banks show two truths of the current dispensation: there is no effective hedge against politics and the reflation trade rests on fragile foundations.
Neither of these realities is particularly good for financial markets and neither is going away any time soon.
Both, too, are utterly related not just to each other, but to the Senate election in Massachusetts which installed a Republican into what had been a Kennedy seat, in the process terrifying Democrats who fear they will be sunk by association with a set of policies perceived to be favoring Wall Street.
In the aftermath, President Obama unveiled a policy authored by former Fed chief Paul Volcker, which is intended to make financial firms get out of the business of using government insurance to underwrite speculative bets; well, er, not all speculative bets, but the bad kind.
At the same time the confirmation of Bernanke is under threat, and he and the institution he works for had to endure the humiliation of seeing Senator Harry Reid issue a statement endorsing him but implying that he’d extracted some sort of undertaking from the central banker to “redouble” his efforts to help those struggling in the recovery.
Whether all of this is good or bad, or even if it has much of an impact, the fact is that both are the result of a financially struggling electorate which is going to strive to control things that they’ve previously been convinced to more or less let alone.
That’s quite a change from a few years ago, when most of us sat around stroking our chins and praising Alan Greenspan, banks and market forces as if they were one and the same. Everyone still agrees that you need banks, a market and a Federal Reserve Chairman, but there is a lot less agreement about how much freedom the three should be given.
And now Obama is a movie star? He is in a movie–called “Stock Shock.” … exposing greedy hedge funds and market manipulation. Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell, I liked it because it shows the dark side of Wall Street. DVD is everywhere for sale or rent but cheaper at http://www.stockshockmovie.com
Fed’s wondrous printing press profits
– James Saft is a Reuters columnist. The opinions expressed are is own. –
Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.
Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.
Combine news of the Fed’s biggest profit in its 95-year history with a report from the Troubled Asset Relief Program that its investments in banks are now showing a $7 billion gain and you’d be forgiven for concluding that this whole bailout malarkey is the next best thing to striking oil.
The two notional profits are of course related and prove little more than that if you have bottomless pockets you can make the price of a given asset rise. And while the trick for the Fed will be in how it exits its currently profitable positions, the real costs are more complicated and potentially much greater.
The means by which the Fed turned this magnificent profit are eerily similar to what Wall Street has been practicing: they grew their balance sheet and took on more risk. Its profits were generated by two related moves: it bought far more bonds than it had in the past and, perhaps more importantly, it bought bonds of lower quality as part of the rescue efforts. Those risky bonds have risen in price, as anything that the Fed decided to start buying in size would, be they baseball cards, Florida time shares or limited edition commemorative plates.
Thanks to Mr. Debusmann and the Reuters for bringing the facts before its subscribers and readers
When the clerical dictatorship in Iran Rvrzanh suppresses the Iranian people. When the Iranian regime’s main threat is global peace and stability, when the Iranian people themselves, relying on themselves and resist the force of this regime are standing wild, at least do the work that the U.S. government to the people of history and head thrown not be impartial in this battle is keeping a list PMOI by the U.S. government and the Iranian regime takes a good message for those who believe democracy is not, it is shameful that date must be replicated again and the U.S. government along with the enemy Iranian people stand
Fed stuck doing the heavy lifting
-James Saft is a Reuters columnist. The opinions expressed are his own- With employment weak and consumer credit weaker, look for extended official measures to support the U.S. economy.
Recent data show that despite emerging glimmers in manufacturing, de-stocking having reached its limit, and some strong showings globally, the U.S. recovery is far from self-sustaining.
With Congress serving as an effective roadblock to a comprehensively expanding fiscal stimulus, the heavy lifting, if any is to be done, may fall on monetary policy and “off balance sheet” forms of stimulus.
The Christmas eve move to suspend any cap, previously $400 billion, on the bailouts of Fannie Mae and Freddie Mac is an example of the latter, while more mortgage buying and virtually zero interest rates from the Federal Reserve are probably in store.
“Markets are still thinking of monetary policy strictly as changes in interest rates — even though the Fed has been conducting successful policy this past year through quantitative easing,” St Louis Fed President James Bullard said in Shanghai Monday. “Markets should be focusing on quantitative monetary policy rather than interest-rate policy.”
The big question is “how to adjust the asset purchase program without generating inflation and still providing support to the economy while interest rates are near zero,” Bullard said. “Interest rates may remain low for quite some time.”
A recent run of very poor economic data nicely illustrates the fact that, despite having underwritten the banking system and made progcress on reflating asset markets, there really is no simple, elegant, low-cost solution to a balance-sheet recession.
Bernanke should be fired……. yesterday!