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Fed official: Public deserves detailed policy road map

KocherlakotaA 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.

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

Italian bond yields hit 14-year high as debt fears worsen

Berlusconi
Investors pushed yields on Italian government bonds to new euro-era highs on Monday, a further blow to European leaders' efforts to keep their 2-year-old debt crisis from spiraling out of control.

Italy, which has the world’s third-largest bond market after the U.S. and Japan, has been in traders’ cross hairs for the last two weeks as doubts have mounted about Europe’s latest plan to contain its debt debacle.

The market yield on 10-year Italian bonds surged to 6.57% on Monday, up from 6.37% on Friday and the highest since 1997.

The yield has rocketed from 5.50% just four weeks ago, and has continued to rise even though the European Central Bank is believed to have been buying Italian debt in the market, trying to keep a lid on rates.

To put Italy’s borrowing rates in perspective, German 10-year bonds pay just 1.78%. U.S. 10-year Treasury notes yield 1.99%.

Italian bond yields “are the litmus test now for the Eurozone debt crisis,” said David Rosenberg, market  strategist at Gluskin Sheff & Associates in Toronto.

Italian yields jumped at the outset of trading, then pulled back briefly as rumors swirled that embattled Italian Prime Minister Silvio Berlusconi would resign. But Berlusconi said he had no intention of leaving.

Eurozone leaders on Oct. 27 announced a plan to expand their $600-billion rescue fund for member states and banks, hoping to stop the continent’s debt nightmare from spreading.

The idea was to boost the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it. The fund could then eventually guarantee bonds issued by deeply indebted countries, particularly Italy.

The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But confidence in the fund as a solution has faded. Eurozone leaders have so far been unable to persuade major creditor nations, such as China, to contribute to the bailout fund as hoped.

Many analysts believe that an interest rate of 7% on long-term Italian debt would be so prohibitive for Italy that it would be forced to seek help from the rest of Europe to pay its bills.

Yet so far, “It is abundantly obvious . . . that there is no comprehensive plan to solve the crisis, at least not one that is yet viable and ready to be implemented and appropriately and adequately funded,” Rosenberg wrote in a note to clients.

Despite the worsening debt picture, most European stock markets were only modestly lower on Monday. And the Italian market, which dived 7.8% last week, managed to edge up 1.3% on Monday.

The euro currency weakened slightly, losing 0.3% to $1.376.

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Photo: Italian Prime Minister Silvio Berlusconi. Credit: Max Rossi /Reuters

Italian, Spanish bond yields jump as Eurozone worries deepen

Italyparlia
While the Greek tragedy continues to play out -- the country's Parliament will hold a confidence vote in the government later Friday -- the financial outlooks for Spain and Italy are worsening.

And those huge economies are far more important for the future of Europe than whatever happens to Greece.

Investors continued to demand higher yields on Spanish and Italian bonds on Friday, raising the grim prospect that those governments will be priced out of the debt market at some point.

The yield on 10-year Italian bonds jumped to 6.37%, up from 6.19% on Thursday and the highest since 1997. The yield has surged from 4% a year ago.

This is exactly what Eurozone leaders were trying to avoid when they announced their plan a week ago to expand their $600-billion rescue fund for member states and banks, hoping to stop the continent’s 2-year-old debt crisis from spreading.

The idea was to boost the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it. The fund could then eventually guarantee bonds issued by deeply indebted countries, particularly Italy.

The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

Instead, confidence continues to evaporate. It didn’t help Friday that Eurozone leaders said they have so far been unable to persuade major creditor nations, such as China, to contribute to the bailout fund as hoped.

“Events continue to spiral beyond the control of European policymakers,” wrote Win Thin, a currency strategist at Brown Bros. Harriman in New York, in a note to clients. “Italian borrowing costs have continued to march upwards to new euro-era highs, with the 10-year quickly approaching the 7% level that many see as the point of no return.”

Markets felt no better after Italy on Friday agreed to have the International Monetary Fund and the European Union monitor its efforts to cut spending and implement other reforms to bring down its heavy debt load.

Spain also is being hit by fresh doubts about its creditworthiness. The yield on 10-year Spanish bonds rose to 5.58%, up from 5.50% on Thursday and the highest since early August. The yield on two-year Spanish debt jumped to 4.26% from 4.10% on Thursday.

European stock markets ended broadly lower for the day and the week, though share prices remain above their September lows. Italian stocks lost 2.7% on Friday and 7.8% for the week. The Spanish market fell 1.3% for the day and 6.8% for the week.

The euro currency is showing surprising strength in the face of all of this. The euro was at $1.378 on Friday, down 0.3% from Thursday but well above the recent low of $1.318 reached on Oct. 3.

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-- Tom Petruno

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Photo: Italy's lower house of Parliament. Credit: Max Rossi / Reuters

Gold jumps as European Central Bank cuts interest rates

Gold coins
Gold broke out to a six-week high Thursday after the European Central Bank surprised markets by cutting interest rates.

For investors who believe that paper currencies are headed for further debasement by central banks, the move provided a good excuse to shovel money into precious metals as an alternative.

Near-term gold futures in New York rose $35.50, or 2.1%, to $1,764.20 an ounce, the highest closing price since Sept. 21.

Silver got a smaller lift, adding 56 cents to $34.49 an ounce. Silver had reached a five-week high of $35.29 last Friday.

The ECB, under new chief Mario Draghi, cut its benchmark short-term rate to 1.25% from 1.50%, in the first reduction since May 2009.

Draghi said the cut was justified because he believed the Eurozone economy was headed for a “mild recession.” Europe has been reeling from its debt crisis and from the austerity imposed by government spending cuts.

The euro currency initially slid after the surprise rate move, falling as low as $1.367 from $1.374 on Wednesday. But the euro rebounded after Greece’s prime minister reneged on his threat to hold a voter referendum on the terms of the country’s bailout by the rest of Europe. The euro was at $1.382 at about 1 p.m. PDT.

Draghi vowed the ECB would not accede to calls that it print massive amounts of new money to boost its purchases of sovereign bonds in Europe. But that didn't deter gold buyers.

Gold had rocketed in August, reaching a record closing high of $1,888.70 an ounce Aug. 22, as stock markets tumbled worldwide on fears that the Eurozone would implode.

But as stocks fell further in September, gold and silver too were slammed. Many analysts say the metals took a hit as some investors and traders sold whatever they could to raise cash amid continued market turmoil.

After bottoming at $1,595 on Sept. 26, gold has been fighting its way higher again. It’s now down 6.6% from its August peak but up 24% year to date -- on track for an 11th straight annual gain.

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Photo: Gold coins and bars. Credit: Mike Segar / Reuters

30-year mortgage rate drops to 4%, Freddie Mac says

Bankownedgettyimagesjoeraedle
Investor worries over the European debt crisis helped drive the average rate for a 30-year fixed home loan down to 4% this week, according to Freddie Mac.

The figure, down from 4.1% last week, was the second lowest in the 40 years Freddie has been conducting a weekly survey of the terms being offered by home lenders. The lowest average rate recorded was 3.94% four weeks ago.

Freddie Mac said lenders were offering 15-year loans, a popular choice for homeowners who are refinancing, at an average rate of 3.31%, down from 3.38% a week earlier. That rate was below 3.3% for three weeks in late September and early October.

To obtain the loans at the rates being offered this week, a borrower would have to pay upfront fees averaging 0.7% of the amount borrowed.

Worried about the possibility of defaults on European debt, investors rushed to buy U.S. Treasury securities early this week, driving down interest rates.

The low mortgage rates have created an opportunity for some homeowners who are current on their loans to trade them in for new mortgages, often lowering their interest costs dramatically.

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Photo: Foreclosures like this one in Miami clog the market with homes. Credit: Joe Raedle / Getty Image

Stocks slump as rising Italian yields cast doubt on Europe rescue

Silvio
Another jump in yields on Italian government bonds is raising fresh doubts about Europe's latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down about 165 points, or 1.4%, to 12,064 at 11:40 a.m. PDT, after surging 3.6% last week.    

Most European stock markets fell 2% to 4% on Monday after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose to 6.09%, the highest level since early August, up from 6.02% on Friday. The yield on two-year Italian bonds surged to 4.99%, up from 4.75% on Friday and the highest rate since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, a major goal was to halt the "contagion" before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts, the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it.

The fund is expected to eventually guarantee bonds issued by deeply indebted countries, particularly Italy. The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work -- or they believe the Europeans will drag their feet implementing it. Although the broad framework of the rescue was announced Thursday, many of the details are still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of carmaker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership [in] the euro are all at risk," he said.

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Photo: Italian Prime Minister Silvio Berlusconi. Credit: Remo Casilli / Reuters

Bad sign for Europe rescue plan: Italian bond yields jump

Italyparliament
One day later, and markets already are having second thoughts about Europe’s plan to end its government-debt crisis.

In a particularly troubling sign, yields jumped Friday on Italian and Spanish government bonds. Those are the Eurozone countries that the rescue plan is meant to save from Greece’s fate.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund -- known as the European Financial Stability Facility -- to $1.4 trillion by leveraging it.

The fund is expected to eventually issue guarantees on bonds issued by deeply indebted countries, particularly Italy. The goal: bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But on Friday, investors failed to give Italy the benefit of the doubt as the country’s treasury sold $11.2 billion in bonds and paid more than expected. The market yield on 10-year Italian bonds surged to 6.02%, up from 5.88% on Thursday and the highest since early August.

The yield on two-year Italian bonds rocketed to 4.75% from 4.43% on Thursday, and now is the highest since 2008.

Yields also jumped on Spanish government debt. The yield on the country’s 10-year bonds rose to 5.51% after falling to 5.33% on Thursday. But the rate remained below its recent high of 5.55% reached on Monday.

Italian and Spanish yields rose despite rumors that the European Central Bank was buying the countries' debt in the open market.

European stock markets ended mostly lower Friday, but gave back little of Thursday’s rally. The French market lost 0.6% after soaring 6.3% on Thursday. Italian stocks were down 1.8% after a 5.5% jump a day earlier.

The euro slipped to $1.417 from $1.418 on Thursday.

U.S. stocks were little changed at about 10:30 a.m. PDT. The Dow Jones industrial average was up 20 points or 0.2% to 12,228. The Dow had surged 339 points, or 2.9%, on Thursday.

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Photo: The Italian Parliament in Rome. Credit: Marc Hill / Bloomberg News

European stocks soar as bond yields fall; euro rockets

Merkelsummit
Europe’s financial rescue plan is having the effect the continent’s leaders hoped for.

Stocks have surged across Europe and government bond yields in the most troubled countries pulled back.

The euro currency rocketed to $1.420, up 2.1% for the day and the highest since Sept. 2.

Money also poured into U.S. stocks, lifting the Dow Jones industrial average more than 300 points.

"Investors around the world are cheering the fact that the Europeans have sucked it up and done what was necessary to mitigate a deeper crisis in the region," said Kathy Lien, director of currency research at GFT Forex.

A key element of the debt-crisis plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the size of the fund -- known as the European Financial Stability Facility -- to show that authorities are serious about dousing the debt crisis once and for all.

The EFSF would be leveraged to raise its firepower to $1.4 trillion. One expectation is that the fund would issue guarantees on bonds issued by deeply indebted countries, particularly Italy.

The goal: bring down interest rates on those bonds by making investors more confident about buying them.

The markets’ faith in the plan, at least for the moment, showed as yields on two-year Italian bonds fell to 4.43% from 4.56% on Wednesday.

Portuguese two-year bond yields slid to 17.81% from 19.06%; on Spanish two-year bonds the yield fell to 3.68% from 3.92%.

Stock prices rocketed in relief, led by bank issues. The Italian market jumped 5.5%, Spanish shares gained 5.0%, the French market soared 6.3% and even Greek stocks rose sharply, rallying 4.8%.

On Wall Street, the Dow Jones industrial average was up more than 300 points, or 2.5%, to 12,169 at about 10 a.m. PDT.

[Updated at the closing bell: The Dow gained 339 points, or 2.9%, to 12,208.55 for the day, its highest level since July 28. It's up 5.4% year to date.]

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Photo: German Chancellor Angela Merkel speaking after the Eurozone summit on Thursday. Credit: Geert Vanden Wijngaert / Associated Press

 

Asian stocks, euro rise on European rescue plan

Asian stock markets and the euro currency rallied on Thursday on word of Europe’s new plan to contain its two-year-old government debt crisis.

Share prices were up across the Asia-Pacific region at midday, with Japan’s Nikkei-225 index up 1.4%, the South Korean market up 1.2% and Australian shares up 2.3%.

The euro currency rose 0.5% to $1.398 from $1.391 on Wednesday. The euro has rebounded from its recent low of $1.318 on Oct. 3.

Yields rose on U.S. Treasury bonds trading in Asia, a sign that some investors were moving out of the classic haven of American government debt. The 10-year T-note yield edged up to 2.23% from 2.21% on Wednesday.

The plan to boost the firepower of Europe's rescue fund for struggling member states to an estimated $1.4 trillion "might just finally convince the skeptical markets that this time the backstop against contagion is for real," said Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi.

European authorities will be bracing to see how the continent’s bond and stock markets react when trading opens at midnight PDT.

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Will Europe's rescue plan work? Watch the bond market

Flags
The verdict on Europe’s latest attempt to end its government debt crisis may be most apparent in the continent's bond market Thursday.

If investors sharply push up yields on the bonds of the Eurozone’s financially troubled states, it will signal a lack of confidence in the plan that emerged from European leaders’ summit.

But if yields fall, Europe may be able to finally declare victory in containing the two-year-old debt crisis.

Early Thursday in Brussels, European heads of state and major banks announced that they had agreed to a voluntary 50% writedown of Greek bonds as a way to slash the country’s debt burden. Banks most likely will exchange current bonds for a reduced principal amount of new debt.

The idea would be to give the devastated Greek economy more room to recover by slashing debt payments. But the writedown also would mean losses for the banks, which already face the prospect of raising fresh capital to bolster their balance sheets by mid-2012.

So another key element of the debt-crisis plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus has been on giving the fund -- known as the European Financial Stability Facility -- more firepower to show that authorities are serious about dousing the debt crisis once and for all.

French President Nicolas Sarkozy told reporters early Thursday that the EFSF would be leveraged four to five times to boost its ability to backstop struggling states. One expectation is that the fund would issue guarantees on bonds issued by deeply indebted countries, particularly Italy.

The goal: bring down interest rates on those bonds by making investors more confident about buying them.

The annualized market yield on two-year Italian government bonds has surged to 4.56% from 2.88% at the start of the year. By contrast, Germany pays just 0.52% on two-year debt. On 10-year Italian bonds the yield now is 5.93%, up from 4.82% at the start of the year and 3.73% one year ago.

“Italy has a lot of debt to roll over during the next three years,” said Nic Colas, chief market strategist at brokerage ConvergEx Group in New York. If market yields rise further, the country’s ability to finance its debt would become much more doubtful.

It’s already too late for Greece. But the fear all along has been that rising borrowing rates would bring down much bigger countries in the Eurozone, triggering a new global financial cataclysm.

So the bond market’s reaction Thursday will be key: Will investors have enough faith in the rescue plan to allow bond yields to fall in Italy, Portugal, Spain and other troubled countries?

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-- Tom Petruno

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Photo: The flags of the European Union and Greece flying in Athens. Credit: Louisa Gouliamaki / 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

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