Obama taps ex-Treasury official, Harvard economist for Fed Board

President Obama on Tuesday nominated a former Treasury official and a Harvard economist to fill two vacancies on the Federal Reserve Board of Governors.

The nominees, Jerome H. (Jay) Powell and Jeremy C. Stein, would serve 14-year terms on the board if they are confirmed by the Senate.

"I am grateful that these individuals have agreed to serve their nation at this important time for our economy," Obama said. "Their distinguished backgrounds and experience coupled with their impressive knowledge of economic and monetary policy make them tremendously qualified to serve in these important roles."

Powell is a visiting scholar at the Bipartisan Policy Center in Washington, D.C. He served as  undersecretary of the Treasury for Finance under President George H.W. Bush. Stein is on the economics faculty at Harvard. In 2009, he served on the staff of the National Economic Council and was a senior advisor to Treasury Secretary Timothy F. Geithner.

Obama is trying to get the seven-member Federal Reserve Board back to full strength for the first time since mid-2010 after running into difficulty with one of his nominees this year. Nobel Prize-winning economist Peter Diamond was nominated in 2010 along with Janet L. Yellen and Sarah Bloom Raskin.

Yellen and Raskin were confirmed by the Senate, but Diamond ran into strong opposition from Republicans and withdrew in June.

RELATED:

Fed puts off any new policy action until 2012

Peter Diamond withdraws as Federal Reserve nominee

Obama to nominate three for Fed

-- Jim Puzzanghera in Washington

Photo: Harvard economist Jeremy Stein. Credit: Bloomberg.

 

Fed, more upbeat about economy, leaves monetary policy unchanged

The Federal Reserve, providing a somewhat more upbeat assessment of the economy, on Tuesday kept the benchmark short-term interest rate near zero but did not take any new steps to boost financial markets or the economy.

Top Fed policymakers, at the conclusion of their final scheduled meeting of the year, said the latest data indicate the economy "has been expanding moderately" and "point to some improvement in overall labor market conditions."

However, the Fed again warned that "strains in global financial markets," namely the threat from the European debt crisis, "continue to pose significant downside risks to the economic outlook."

Additionally, policymakers said that although consumer spending was growing, increases in business investments, one of the bright spots of the recovery, appear to be moderating and the housing market remains depressed.  

As expected, the Fed reaffirmed its pledge, first made in August, to maintain the federal funds rate near zero until at least mid-2013. This benchmark rate, which influences many types of loans, has been held at rock-bottom levels since the depths of the recession in December 2008.

Some people on Wall Street were hoping that the central bank would signal its intentions to make additional moves to stimulate the economy in light of the high unemployment rate, 8.6% in November.

As in the last meeting in early November, one Fed official, Charles Evans of the Federal Reserve Bank of Chicago, dissented from Tuesday's decision to stand pat on policy, saying that he thought the central bank should be doing more.

Many analysts believe that Fed Chairman Ben S. Bernanke and his colleagues will soon announce a new communications strategy that would include a forecast for the federal funds rate, possibly along with targets for inflation and unemployment, the Fed's chief economic concerns. By giving more information about its goals and where short-term rates are likely to be further out, the Fed's new communications plan could influence investors' actions and the broader economy.

The Fed’s next policy meeting is scheduled for Jan. 24-25.

-- Don Lee

Fed says it takes no risk in lending dollars for Europe

Stocks soared Wednesday as global markets lauded central banks’ decision to funnel more money into the financial system, a move mainly aimed at assisting struggling European banks.

But the agreement to expand so-called currency liquidity swap arrangements among the Federal Reserve, the European Central Bank and four other central banks could be viewed another way: an act of desperation.

“It suggests that policymakers’ concerns about the outlook are significant and have increased substantially,” economists at Nomura Securities International wrote in a report.

For its part, the Fed insisted that it's taking no real risk under the program.

Europe is the epicenter of global financial worries, of course. Soaring market interest rates on government bonds across the continent over the last month have further weakened European banks. That’s because their bond holdings have dropped in value with each rise in rates.

In shades of 2008, fear of a new round of bank failures has made lenders worldwide increasingly reluctant to do business with European banks. That has made it more difficult for some banks to get the dollars they need to repay their own debts -- for example, when a U.S. money market fund calls in a loan it previously made to a European bank.

To avert a new global credit squeeze, the Fed agreed to make more dollars available to the ECB and other central banks, and to cut the interest rate for such loans. That, in turn, will allow the ECB to lower the cost of dollars it lends to individual commercial banks.

The Fed noted on its website that it lends only to other central banks under these arrangements, and that the borrowing central bank “therefore bears the credit risk associated with the loans.”

In other words, the Fed isn’t on the hook if the ECB’s dollar loans to individual banks go bust.

The Fed also said it doesn’t bear any risk of currency loss on the loans, if for example the euro’s value were to fall against the dollar. (The euro rose Wednesday, gaining 1% to $1.345.)

The swap program doesn’t attack the most pressing problem in Europe, which is the surge in government bond yields. The central banks aren’t directly funneling money to cash-strapped European governments.

“These actions do not address solvency issues in European sovereigns,” analysts at Keefe Bruyette & Woods wrote in a note to clients.

Still, bond yields fell across most of Europe on Wednesday. The yield on two-year French bonds slid to 1.29% from 1.58% on Tuesday. Italian two-year bond yields eased to 6.93% from 7.10%, the third straight drop after reaching a euro-era high of 7.66% on Friday.

Despite the Fed’s assurances, one of the central bank’s harshest critics -- Rep. Ron Paul (R-Texas) --  attacked the swap agreements.

“Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis,” Paul said in a statement.

“The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending” in Europe,  Paul said.

RELATED:

Dow has best day since March 2009

Central banks join forces to ease debt crisis

Americans feel more confident, but should they?

-- Tom Petruno

Photo: The Federal Reserve building in Washington. Credit: Andrew Harrer / Bloomberg News

Fed action won't stave off threats to euro or global economy

The coordinated action by the Federal Reserve and five other major central banks will help dollar-strapped European banks, but analysts said it doesn’t address the fundamental problems threatening the breakup of the euro and the global economy.

The Fed, with the European Central Bank, the Bank of Japan and three others, jointly announced Wednesday that they would offer cheaper access to dollars in an attempt to quell growing fears of a global funding crunch.

The Fed said the move, which expands on a joint effort by the central banks first announced in September, was intended to "ease strains in financial markets" and mitigate the resulting effects of a credit squeeze for businesses and households.

The announcement gave an immediate huge lift to European markets, and U.S. stocks surged. The euro rose against the dollar.

The markets also got a boost by a separate announcement by the People’s Bank of China, which announced a plan to inject more cash into its economy by lowering bank reserve requirements by half a percentage point. It was Beijing’s first monetary easing in three years and comes amid signs of economic slowing in the world's second-largest economy.

The Fed and other central banks’ action lowers the cost of so-called dollar swap lines by a half-percentage point, a move that would likely increase the flow of cash to European lenders. The new pricing would take effect next Monday.

As the debt crisis has intensified, European banks have seen a dwindling of dollar funding as vital sources such as U.S. money market funds have been reducing their exposure to the continent’s lenders.

“The open market used to be a cheap source of obtaining dollar funding by European banks, but this is becoming more economically unviable,” said Enam Ahmed, senior economist at Moody’s Analytics in London. “Banks are responding by reducing their dollar assets in a bid to raise dollar funds,” which has resulted in increasing evidence that European banks are pulling back from dollar-funded projects around the globe and raising the risk of a credit crunch.

“This action would reduce some of the strains in the global financial system,” he said.

Central banks join forces to ease debt crisis

Reacting to the deepening Eurozone debt crisis, the Federal Reserve and five other major central banks joined forces Wednesday to offer European lenders easier access to dollars in an attempt to quell growing fears of a global funding crunch.

The Fed said its coordinated action with the European Central Bank, the Bank of Japan and three others was intended to "ease strains in financial markets" and mitigate the resulting effects of a credit squeeze for businesses and households.

The announcement gave an immediate lift to European markets, and U.S. stock futures surged.

The action, which follows a similar coordinated move in September, lowers the cost of so-called dollar swap lines to increase the flow of cash to European lenders. The new pricing would take effect next Monday.

Separately, the People's Bank of China announced a plan to inject more cash into its economy by lowering bank reserve requirements by a half a percentage point. It was Beijing’s first monetary easing in three years, and comes amid signs of economic slowing in the world's second-largest economy.

RELATED:

Americans feel more confident, but should they?

China's central bank cuts reserve ratios to boost sagging economy

--  Don Lee in Washington

Photo: The U.S. Federal Reserve building in Washington. Credit: Bloomberg News

Odds of 'double-dip' recession about 50-50, S.F. Fed report says

Fallout from the current European debt crisis could help plunge the United States economy back into recession by early next year.

A report released Monday by the Federal Reserve Bank in San Francisco pegged the chance of recession at 1 in 2 during the first half of 2012.

"The deteriorating fiscal realities in Europe have been keeping many a trader awake at nights, reliving the nightmare of the near-collapse of financial markets in the wake of the Lehman Bros.  bankruptcy " of Sept. 15, 2008, the bank's Economic Letter said.

The economy was already weakened by disruptions in international trade stemming from the Japanese earthquake and tsunami in March, the report said.

However, if the U.S. economy avoids falling into recession in the first half of next year, the risk of it doing so in the second half of the year should begin to ease, the letter said.

Economists formally define a recession as declining gross domestic product -- the value of all goods and services -- for two or more consecutive quarters. The so-called Great Recession officially started in December 2007 and ended in June 2009. Its effects, the most severe since the 1930s, continue to be felt, particularly with high unemployment.

 Related:

Lower yields on Italian bonds help stabilize markets

Nevada casinos see big drop in gambling revenue

New applications for unemployment claims drop to 390,000

-- Marc Lifsher

Photo: A policeman watches Occupy Wall Street protesters at the Federal Reserve Bank in San Francisco last month. Credit: Robert Galbraith / Reuters



Warren Buffett laments that Europe has no Bernanke or Paulson

 

 

Billionaire investor Warren Buffett said Europe lacks the type of strong government financial officials with broad powers who helped stabilize the U.S. economy in the fall of 2008, a deficiency that is prolonging the debt crisis caused by Greece and Italy.

Speaking on CNBC on Monday morning, Buffett said it's not clear who in Europe could play the role that Federal Reserve Chairman Ben S. Bernanke, former Treasury Secretary Henry M. Paulson and former President George W. Bush did in 2008 in assuring markets they would do whatever it took to stem that financial crisis.

The void has led to a run on European debt and investments, Buffett said.

"It’s very very tough to stop a run," said Buffett, whose Berkshire Hathaway Inc. sold all of its European sovereign debt more than a year ago and is not ready to jump back in. "It takes a … widespread belief that the people in authority will do whatever it takes to stop it and they have the ability to do whatever it takes."

"We believed Bernanke and Paulson and the president of the United States when they said that in September of 2008," Buffett said. "There's no one in comparable authority in Europe."

While he's encouraged by the new political leadership in Greece and Italy, Buffett said he's still concerned about the Eurozone's financial situation. Berkshire Hathaway owns no stock in any bank within the zone, he said.

But Buffett appeared confident that Europe eventually would overcome the crisis.

"Europe has all kinds of strengths. Europe is not going to go away," Buffett said. "Ten years from now, we will be selling more goods to Europe and buying more goods from Europe and they will have more GDP per capita. But getting from here to there may be a problem."

RELATED:

Economist named Italy's new prime minister

 Europe crisis makes pecking order clear: 'Merkozy,' then the rest

At G-20, U.S. stays on the sidelines in Europe debt crisis

-- Jim Puzzanghera in Washington

 

Fed official: Public deserves detailed policy road map

A top Federal Reserve official thinks the central bank should get very detailed about how it would change policy in the future, depending on what happens in the economy.

Narayana Kocherlakota, president of the Fed’s Minneapolis bank and a voting member of the Federal Open Market Committee, on Tuesday called for the Fed to provide a “public contingency plan” spelling out potential future moves.

In a speech in Sioux Falls, S.D., Kocherlakota said the idea of such a plan would be to “provide clear guidance on how [the Fed] will respond to a variety of relevant scenarios” -- for example, how much short-term interest rates would be raised if inflation were to rise above a certain level.

The Fed has been talking a lot more lately, internally and publicly, about how best to communicate its views on the economy and possible policy changes. That's one reason why  Chairman Ben S. Bernanke earlier this year agreed to hold periodic news conferences.

Some Fed officials, including Kocherlakota, want to push the central bank into laying out specific policy reactions to economic shifts.

From his speech:

For example, the Committee recently projected that in 2011, core inflation will be 1.9% and that it will fall back in 2012 and 2013 to around 1.7%. Suppose hypothetically that core inflation, and the outlook for core inflation, has risen to 3% by the end of 2013, while unemployment has fallen to between 8% and 8.5%. A public contingency plan would allow the public to know what the Committee intends to do in that eventuality.

Kocherlakota was one of three Fed officials who dissented at the central bank’s August and September meetings, when the majority of policymakers voted to offer more help to the economy. At the August meeting the Fed said it was likely to hold its benchmark short-term rate near zero for at least another two years.

Kocherlakota thought that was going overboard. He believes that laying out a specific plan of what the Fed would do, based on what actually happens in the economy, would allow businesses and consumers to make better decisions about spending, investing and hiring.

“I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest,” Kocherlakota said. “Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend. A public FOMC contingency plan can help reduce the level of policy uncertainty being created by the Fed.”

Other Fed officials, however, have raised concerns that such a plan could hamstring the central bank.

Kocherlakota doesn’t buy it:

No contingency plan can ever be definitive. Inevitably, the FOMC will learn things that it did not expect to learn, and events will occur that it did not expect to occur. And so there may be conditions that force the FOMC to deviate from a chosen plan. However, having a public plan, and couching its decisions against the backdrop of that plan, will enhance Federal Reserve transparency, credibility, accountability and consistency.

RELATED:

Bernanke to Occupy Wall Street: 'I get it'

Fed cuts growth forecast, boosts jobless-rate estimates

Fed stands pat on policy; text of post-meeting statement

-- Tom Petruno

Photo: Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis. Credit: Federal Reserve

Bernanke to Occupy Wall Street: 'I get it'

Federal Reserve Chairman Ben S. Bernanke says he has sympathy for the Occupy Wall Street movement’s “dissatisfaction” with the economy.

But he also said his critics were misguided if they believed that Fed policy has been motivated by a desire to protect bankers' incomes.

At a news conference Wednesday following a two-day Fed meeting, Bernanke was asked specifically about the Occupy Wall Street protests.

The question, and his answer:

Question: Chairman, you've said in the past you understand some of the anger on display with the Occupy Wall Street protesters. And a lot of the anger is directed at the Fed, with some protesters saying that the Fed is part of the problem; that the Fed preserves the financial system and promotes income inequality.

Can -- are the protesters right? Is the Fed part of the problem? And secondarily, can the Fed do anything to promote a more equitable economy?

Bernanke: Well, as I've said before, I certainly understand that many people are dissatisfied with the state of the economy. I'm dissatisfied with the state of the economy. Unemployment is far too high. Inequality, which is not a new phenomenon, it's been going on -- increases in inequality have been going on for at least 30 years. But, obviously, that -- as that has continued we now have a more unequal society than we've had in the past.

So, again, I fully sympathize with the notion that the economy is not performing the way we would like it to be, and in that respect the concerns that people express across the spectrum are -- are understandable.

I think that the concerns about the Fed are based on misconceptions. The Federal Reserve was involved, obviously, in trying to stabilize the financial system in 2008 and 2009, a very simplistic interpretation of that was that we were doing that because we wanted to preserve, you know, banker salaries. That is obviously not the case.

What we were doing was trying to protect the financial system in order to prevent a serious collapse of both the financial system and the American economy. And we needed to take those steps. If we hadn't taken them the consequences would have been dire.

As for how to fix the problem of an “unequal society,” Bernanke said the Fed had no policy options other than trying to boost employment.

“I think the best way to address inequality is to create jobs,” he said. “It gives people opportunities. It gives people a chance to earn income, gain experience and to ultimately earn more. But that's an indirect approach that's really the only way the Fed can address inequality per se.”

He also made what appeared to be a jab at anti-stimulus Republican leaders. “I think it would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs,” Bernanke said.

RELATED:

Obama says nation needs bold action on jobs

Fed cuts growth forecast, boosts jobless-rate estimates

Fed stands pat on policy; text of post-meeting statement

-- Tom Petruno

twitter.com/tpetruno

 Photo: "Occupy" protesters in Philadelphia. Credit: Matt Rourke / Associated Press

 

Fed Chairman Ben Bernanke says growth will be 'frustratingly slow'

Federal Reserve Chairman Ben S. Bernanke said the central bank is doing all it can to spur the economy and reduce unemployment, but admitted that growth “is likely to be frustratingly slow.”

That slower growth -- reflected in a downgrade of the Fed’s economic projections for the rest of the year and beyond -- is not satisfactory, Bernanke told reporters at a news conference Wednesday.

“I certainly understand that many people are dissatisfied with the state of the economy,” he said. "I’m dissatisfied with the state of the economy.”

Bernanke said the Fed was prepared to take stronger action, but for now it was standing pat.

The Fed’s policymaking Open Market Committee took no new actions at the conclusion Wednesday of its two-day meeting, citing somewhat improved economic growth recently, including increased household spending and continued investments by businesses in equipment and software.

But the Fed warned of “significant downside risks to the economic outlook, including strains in global financial markets” -- a clear reference to the European debt crisis.

Bernanke said it was “a bit frustrating” waiting on the sidelines for European leaders to address their problems. “Unfortunately we can’t disassociate ourselves from Europe. The things that happen there do affect us,” he said.

Bernanke said the situation there adds to a string of negative events, particularly the Japanese earthquake and tsunami, that have hampered the U.S. recovery.

“There has been a certain amount of bad luck and I think the volatility in financial markets associated with the European situation has been a drag on the recovery,” Bernanke said. “It’s part of the reason why the second half of 2011 was less strong.”

The continued volatility has dampened the confidence of U.S. consumers, and Bernanke advised people to continue to try to make good financial decisions until the economy is stronger.

“My best advice to Americans is to continue to live your lives and continue to think about your personal situation and continue to make smart decisions based on your own financial situation,” he said.

RELATED:

Fed cuts growth forecast, boosts jobless-rate estimates

Fed stands pat on policy; text of post-meeting statement

Greek move for bailout referendum returns Europe to crisis mode

-- Jim Puzzanghera in Washington

Photo: Federal Reserve Chairman Ben Bernanke attends a news conference following a two-day policy session in Washington. Credit: Reuters

Fed cuts growth forecast, boosts jobless rate estimates

A new forecast from the Federal Reserve paints a gloomier outlook for the economy in 2012 and 2013.

The Fed on Wednesday cut its forecasts for economic growth and boosted its estimates of unemployment.

In revisions to its June forecasts, the Fed now forecasts that growth in real gross domestic product will be in a range of 2.5% to 2.9% in 2012, down from the previous estimate of 3.3% to 3.7%.

Growth in 2013 is likely to be in a range of 3.0% to 3.5%, the Fed said, down from the previous estimate of 3.5% to 4.2%.

GDP grew at a 2.5% annualized rate in the third quarter, a pickup from the 1.3% rate of the second quarter but a moderate pace at best.

The unemployment rate, now 9.1%, won’t come down significantly next year, according to the Fed’s new estimates. The central bank expects the jobless rate to be in a range of 8.5% to 8.7% in 2012, up from the previous forecast of 7.8% to 8.2%.

In 2013 unemployment is likely to be in a range of 7.8% to 8.2%, up from the prior estimate of 7.0% to 7.5%, the Fed said.

“We did overestimate the pace of recovery,” Bernanke said at a news conference following the Fed’s two-day meeting.

The Fed’s estimates are its “central tendency” expectations.

In its post-meeting statement Wednesday, the Fed didn't announce any new initiatives to help the economy, but Bernanke made clear at the news conference that the Fed stands ready to do more if necessary.

RELATED:

Weekly jobless claims dip but remain high

Savings rate falls as spending outpaces income growth

Construction spending and manufacturing growing -- slightly

-- Tom Petruno

twitter.com/tpetruno

Photo: A police officer on guard outside the Federal Reserve building in Washington. Credit: Brendan Hoffman / Getty Images