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Fed stands pat on policy; Bernanke press conference next

Fedfacade
The Federal  Reserve held policy steady after a two-day meeting, citing signs of improved economic growth.

The Fed’s post-meeting statement Wednesday was as expected. Most economists figured the central bank wouldn’t announce any new initiatives to bolster growth.

More interesting commentary may come at Fed Chairman Ben S. Bernanke’s press conference, expected to begin at 11:15 a.m. PDT. It will stream live here.

The Fed’s statement said that recent data indicate that “economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year,” such as the after-effects of Japan’s massive earthquake in March.

But policymakers also said there were “significant downside risks to the economic outlook, including strains in global financial markets” -- an apparent reference to Europe’s ongoing debt crisis.

The Fed took two major steps in recent months to help the economy. In August the central bank indicated that  short-term interest rates were likely to remain near zero for another two years, a view it reiterated in Wednesday’s statement.

In September the Fed decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general.

One Fed official -- Chicago Fed President Charles Evans -- dissented at Wednesday’s meeting, according to the statement. Evans “supported additional policy accommodation at this time,” the statement said, without indicating what kind of action he wanted.

Wall Street slipped after the Fed meeting, giving up part of an early rally that followed two days of heavy selling. The Dow Jones industrial average was up 115 points, or 1%, to 11,773 at about 10:25 a.m. PDT.

Here is the full text of the Fed statement:

Continue reading »

Fed preview: More stimulus unlikely for now, but watch Europe

Benb
Federal Reserve policymakers are expected to signal Wednesday that they’re sitting on their hands for the time being.

Fed officials will conclude a two-day meeting with a statement at 9:30 a.m. PDT and with a press conference by Chairman Ben S. Bernanke at 11:15 a.m.

Most Fed-watchers believe the statement won’t include any new initiatives to help the economy, despite hints in recent weeks by some officials that the central bank could do more.

Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings -- at least for people able to qualify for a loan.

Fed Vice Chairwoman Janet Yellen said on Oct. 21 that another large bond-buying program “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

Despite 9.1% unemployment, however, the economy overall isn’t weak enough to justify another big dose of monetary stimulus via so-called quantitative easing (QE), most economists say. Gross domestic product grew at a 2.5% real annualized rate in the third quarter, slow but not recessionary.

The Fed may not yet have pulled out all the stops, but it has pulled some big ones. In August the central bank took the unprecedented step of indicating that short-term interest rates were likely to remain near zero for another two years. In September the Fed decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general.

“We continue to believe the bar for additional QE is high, as the Fed attempts to conserve its limited ammunition should developments in Europe collapse,” economists at brokerage UBS said in a report Tuesday.

And the Fed, and everyone else, has reason to worry that a European collapse is an increasing risk, after Greece’s latest bombshell Tuesday.

Europe’s seeming inability to end its government debt crisis should make for some interesting questions for Bernanke at his press conference. If the world were to face another 2008-style financial meltdown, what could the Fed do -- other than throw more money at it?

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Photo: Federal Reserve Chairman Ben S. Bernanke. Credit: Karen Bleier / AFP / Getty Images

New Obama refi plan could get help from Fed

Dudley
Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market.

The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac.

A new Fed program “would complement the goals of the administration in helping the housing market,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

Dudley, speaking in New York on the economy, said that the continued weakness in housing was “a serious impediment to a stronger economic recovery. . . . Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures. But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption.”

Noting that the Fed last month decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general -- including mortgage rates -- Dudley said in response to audience questions that the Fed “potentially could move to do more in that direction.”

Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings.

On Friday, Fed Vice Chairwoman Janet Yellen said that another large bond-buying program “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

The average 30-year mortgage rate fell to a generational low of 3.94% in the first week of October, but has since edged up a bit, to 4.11% last week, according to Freddie Mac.

Long-term Treasury bond yields have risen since late September as worries about another U.S. recession have faded, eroding some of the “haven” demand for government bonds. That has helped to put upward pressure on mortgage rates.

The Fed bought $1.25 trillion of mortgage-backed bonds in 2009 and 2010, but it has allowed that portfolio to decline to $860 billion as securities have matured.

Yellen and Dudley are allies of Fed Chairman Ben S. Bernanke. But they face opposition from some Fed officials who believe the central bank already has done enough to boost the economy.

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-- Tom Petruno

Follow me on Twitter: Twitter.com/tpetruno

Photo: New York Fed President Bill Dudley speaking in New York on Monday. Credit: Ramin Talaie / Bloomberg News

Treasury sees strong demand at 30-year bond sale; yields fall

The jump in Treasury bond yields this month brought buyers in for Uncle Sam’s final bond auction of the week.

The Treasury saw strong demand at its sale Thursday of $13 billion of 30-year bonds. The securities were sold at an annualized yield of 3.12%, down from a market yield of 3.20% Wednesday on the previously issued 30-year bond. The recent low on the bond was 2.73% on Oct. 3.

Domestic and foreign investors bought 58% of the securities auctioned, leaving Wall Street dealers to take the rest. The bidding from investors indicated healthy demand, according to bond trader CRT Capital Group in Stamford, Conn.

The 30-year auction followed a disappointing sale of $21 billion in 10-year T-notes on Wednesday. The Treasury sold the 10-year notes at a yield of 2.27%, higher than expected, amid weak interest from foreign investors in particular.

Treasury yields have risen across the board in recent weeks after reaching generational lows in September, when many investors were rushing to buy government bonds as a haven from Europe’s debt woes, stock market volatility and fears of another U.S. recession.

The 10-year T-note hit a 60-year low of 1.72% on Sept. 22.

Since then, however, European authorities have been moving faster to contain their debt crisis, and U.S. economic data have pointed to slow growth but not recession. That has dimmed what had been a ravenous investor appetite for Treasuries.

The 10-year T-note yield, a benchmark for mortgages, had risen in 11 of the previous 13 trading sessions through Wednesday. On Thursday it pulled back to 2.15% by about 11:15 a.m. PDT.

Analysts note that longer-term Treasury bonds have a special friend in the market now: The Federal Reserve on Sept. 21 said it would shift $400 billion of its $1.6-trillion Treasury portfolio from shorter-term securities to longer-term bonds over the next nine months, providing another source of demand for issues such as the 10-year T-note and the 30-year T-bond.

The Fed, however, doesn’t step in to buy Treasuries at auctions.

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-- Tom Petruno

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Weak demand at Treasury note sale drives rates up

Treasbuild
The U.S. Treasury saw weak demand at its auction of new 10-year notes, a sign that investors’ hunger for government bonds as a haven continues to ebb -- at least at current low interest rates.

The disappointing auction results Wednesday helped drive market yields on Treasuries higher across the board for a sixth straight trading session. A strong rally in stocks also helped pull money from bonds to equities.

Uncle Sam sold $21 billion of 10-year T-notes at an annualized yield of 2.27%, significantly above the 2.24% yield that analysts had expected just before the auction and up from the 2.15% yield on previously issued 10-year notes on Tuesday.

The 10-year yield, a benchmark for mortgages rates, now is at its highest level since late August.

Wall Street dealers were forced to take 58.5% of the offering Wednesday, higher than normal, because many investors stayed away. Foreign demand was particularly weak, traders said.

The market yield on the 10-year T-note fell to a 60-year low of 1.72% on Sept. 22, when Europe’s deepening debt crisis and fears of another global recession had many investors running for cover.

The rush to Treasuries also had been stoked by the Federal Reserve’s announcement Sept. 21 that it would shift $400 billion of its $1.6-trillion Treasury portfolio from shorter-term securities to longer-term bonds over the next nine months, providing another source of demand for issues such as the 10-year T-note.

Many analysts had expected Treasury yields to rebound somewhat after frenzied buying drove rates to generational lows last month. The 10-year T-note sale suggests that the rebound isn’t over, said George Goncalves, a rate strategist at Nomura Securities in New York.

"It is a rare occurrence for the 10-year Treasury auctions to perform this poorly, especially after a week of rates backing up into the supply event," Goncalves said in a note to clients. "This outcome suggests that rates are not yet at the value-zone for overseas investors."

Still, yields declined from the day's highs after the Fed published the minutes of its last meeting. The minutes showed two unnamed central bank officials were pushing for the Fed to further boost its bond purchases as a way to pump money into the financial system.

The 30-year T-bond yield rose to 3.19%, up from 3.10% on Tuesday and the highest since Sept. 20. The government will sell $13 billion of new 30-year bonds Thursday.

Shorter-term yields also continued to rise. The five-year T-note was at 1.15%, up from 1.13% on Tuesday and the highest since Aug. 5.

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Follow me on Twitter: Twitter.com/tpetruno

Photo: The Treasury building in Washington. Credit: Brendan Smialowski / Bloomberg News

10-year Treasury note yield at six-week high as haven demand ebbs

Treasurygallatin
It turns out there is another direction for Treasury bond yields besides down.

The benchmark 10-year Treasury note yield rose Tuesday to its highest level in six weeks as the government tests the market this week with $66 billion in new note and bond sales.

The 10-year yield was at 2.16% at noon PDT, up from 2.08% on Friday and the highest since Aug. 31. The 30-year T-bond yield was at 3.11%, up from 3.02% on Friday and the highest since Sept. 20.

Yields also rose in the shorter-term end of the bond market as the government sold $32 billion of new three-year T-notes at a yield of 0.54%. The yield on previously issued three-year notes has jumped from a low of 0.29% on Sept. 1.

The rise in yields Tuesday partly reflects the bond market’s delayed reaction to the stock market’s surge on Monday, when bond trading was shuttered for the Columbus Day holiday. Stocks soared on Monday, with the Dow Jones industrial average gaining 330 points, or 3%, to 11,433, partly on hopes that European leaders are moving closer to a long-term solution for their debt crisis. Investors moving into stocks often are simultaneously selling lower-risk assets, such as Treasuries.

But the rebound in bond yields over the last few weeks also may reflect that pessimism about the global economy -- and the rush for the relative haven of Treasuries -- had just gotten overdone. The U.S. economy is weak, but it hasn’t fallen off a cliff in recent months, as Friday’s September employment report showed.

The 10-year T-note yield hit a 60-year low of 1.72% on Sept. 22. That followed the Federal Reserve’s announcement that it would shift $400 billion of its Treasury holdings from shorter-term issues into longer-term issues, including the 10-year T-note, by mid-2012.

The Fed’s purchases of longer-term bonds are expected to help keep those yields suppressed. Still, as the yield back-up in recent weeks shows, even the Fed’s buying power hasn’t been enough to keep bond rates at 60-year lows.

With Uncle Sam’s voracious need for fresh cash, “We still have auctions to get through,” said Ray Remy, head of fixed income at Daiwa Capital Markets in New York.

The three-year auction Tuesday saw healthy demand, Remy said. The bigger test will be the Treasury’s sale of $21 billion in 10-year notes on Wednesday and the sale of $13 billion in 30-year bonds on Thursday.

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Photo: A statue of Albert Gallatin, a long-serving U.S. secretary of the Treasury, in front of the U.S. Treasury building in Washington, D.C. Credit: Brendan Smialowski / Bloomberg News

Consumer credit dives $9.5 billion in August

MASTERCARD Americans trying to shake off their debt caused the worst drop in consumer credit in more than a year.

The unpredictable economy had people shunning credit cards and paying off cars and student loans, according to a report Friday from the Federal Reserve. Consumer credit swung down $9.5 billion in August, the first decline since September 2010 and the worst since April 2010.

The month before, credit levels saw an $11.9-billion increase.

Revolving credit, associated mostly with credit cards, tumbled for the second month in a row, down $2.2 billion. Non-revolving credit, linked to borrowing for school and auto purchases, slipped $7.3 billion.

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Bernanke warns Congress against deep budget cuts in weak economy

Photo: Federal Reserve Chairman Ben S. Bernanke testifies before Congress' Joint Economic Committee on Tuesday. Credit: BloombergFederal Reserve Chairman Ben S. Bernanke warned lawmakers Tuesday against cutting the budget too sharply with the U.S. economy still weak and facing new stresses from the European debt crisis.

And the central bank chief expressed some empathy with protesters who have marched on Wall Street and in other cities in recent days complaining of the role of big financial institutions in creating the current economic mess.

"Very generally I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess and they're dissatisfied with the policy response here in Washington," Bernanke told Congress' Joint Economic Committee.

"On some level I can’t blame them," he said. "Like everyone else, I’m dissatisfied with what the economy is doing right now."

Bernanke noted the difficulty for Congress to rein in the long-term federal budget deficit while trying "to avoid fiscal actions that could impede the ongoing economic recovery."

But he said that one factor weighing down the U.S. recovery is "the increasing drag" from cutbacks in government spending.

"Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain," Bernanke told the committee.

He admitted that addressing the long-term budget deficit without further hindering the weak recovery is "a complex situation." And he had unusually sharp words for the bitter debate over raising the U.S. debt ceiling this summer, which led Standard & Poor's to downgrade the nation's credit rating and also hurt market confidence.

Continue reading »

Last of Fed-driven 2010-11 NYSE stock rally is gone

Tradersny
One of the Federal Reserve’s goals with its $600-billion Treasury-bond-buying program launched last November was to boost the stock market by getting more money into the financial system. And thereby, the Fed thought, it would boost the economy.

The central bank did indeed help stoke a rally in stocks a year ago: As Wall Street became convinced that the Fed would act, share prices began to surge in September 2010 after struggling through that summer.

Now, with the latest market slump, the last of those Fed-fueled gains have disappeared -- at least, based on the performance of the average New York Stock Exchange stock.

The NYSE composite index tumbled 3.2% on Monday to close at 6,574.29, taking it below the closing level of 6,704.15 on Aug. 31, 2010.

Nya The index (charted at left) had reached a 2011 high of 8,671.41 on April 29 of this year, a gain of 29% from the end of August. But stocks have fallen every month since April as the U.S. economy has weakened and as Europe’s government-debt crisis has deepened.

The NYSE composite now is down 24.2% from its April high. A drop of 20% or more generally is considered a new bear market.

Even if the Fed’s last economic-stimulus program (which wrapped up in June) didn’t stick, that isn’t keeping Chairman Ben S. Bernanke from trying again: The Fed on Monday launched its newest stimulus effort, whereby it will sell $400 billion of shorter-term Treasury securities and use the proceeds to buy longer-term Treasuries, trying to pull longer-term interest rates lower.

Unlike the last program, however, this one doesn’t involve printing new money. The Fed is merely shifting the makeup of its gigantic bond portfolio.

The stock market, it seems, would have preferred that the Fed rev up the printing press again: The NYSE index has fallen 8.9% since the Fed’s plan was announced on Sept. 21.

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Photo: Traders on the New York Stock Exchange floor on Monday. Credit: Seth Wenig / Associated Press

Fed to monitor Facebook, Twitter to snoop on critics?

Federal Reserve in Washington
The Federal Reserve Bank of New York wants you to friend it -- or at least it wants to understand why you won't friend it.

In a move that illustrates its sensitivity to public perception, the Fed bank reportedly is seeking bids for software to monitor what's being said about it on social media such as Facebook and Twitter. In business vernacular, the Fed has issued a request for proposal. Here's a link to the RFP.

Word of the move has exploded in the blogosphere -- and if the Fed were monitoring social media currently it would find, not surprisingly, that the commentary has been less than flattering. Much of it, in fact, is of the Big Brother variety.

"What they really want to do is to gather information on everyone that views the Federal Reserve negatively," wrote the Economic Collapse blog. "It is unclear how they plan to use this information once they have it, but considering how many alternative media sources have been shut down lately, this is obviously a very troubling sign."

In a report to clients, Nicolas Colas, chief market strategist at ConvergEx Group in New York, attempted to put the firestorm in some (humorous) context.

"When leading presidential candidates threaten the head of the nation's central bank with charges of treason, it is safe to say that criticizing the Fed is the status quo position," Colas wrote. "Throw a bucket of deep-fried Oreos at any number of state fairs this fall and the majority of people you'll hit will likely have an unkind word or two about the U.S. central bank and its handling of the banking system over the last decade."

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Photo: The Federal Reserve in Washington. Credit: J. Scott Applewhite / Associated Press

 

Nicholas Colas, ConvergEx Group chief market strategist.”Ni

Fed official says central bank should keep trying to boost growth

Fed Governor Sarah Bloom Raskin Although the Federal Reserve's efforts to stimulate the economy and boost job creation haven't had great success so far, that shouldn't discourage the central bank from continuing its efforts, Fed Governor Sarah Bloom Raskin said Monday.

Her message was a version of the old adage, "If at first you don't succeed, try, try again."

In a speech at the University of Maryland, Raskin said that although the Fed's easy-money policies have succeeded in keeping interest rates down, their effect on growth and job creation have been "somewhat more muted than I might have expected."

The reasons for that could include the trouble banks and consumers have had accessing credit as well as the oversupply of housing caused by the crash of the real-estate market, she said.

But, Raskin said, the conclusion shouldn't be that more monetary easing wouldn't help.

"Indeed, the opposite conclusion might well be the case -- namely, that additional policy accommodation is warranted under present circumstances," she said.

Raskin, an Obama nominee who took office in October, has supported Fed Chairman Ben S. Bernanke's controversial efforts to try to stimulate economic and job growth.

The Fed's efforts have been sharply criticized as fueling inflation, and top congressional Republican leaders wrote to Bernanke last week urging him against "further extraordinary intervention" in the economy.

But Bernanke has been undeterred and has continued to pursue new strategies. They include a $400- billion initiative approved last week to sell some short-term Treasury bonds in its portfolio and buy longer-term bonds in hopes of reducing long-term interest rates.

Raskin was one of six members of the Fed's Open Market Committee that approved the plan, dubbed Operation Twist. Three members voted against it.

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Photo: Federal Reserve Gov. Sarah Bloom Raskin. Credit: Federal Reserve

 

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