Fed delays rate hikes from “never” to “never ever”
Comments »WASHINGTON (Reuters) – The U.S. Federal Reserve on Wednesday said it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery.
Without making major shifts to its outlook for the economy, the central bank described the unemployment rate as still elevated and said it expects inflation to remain at levels consistent with stable prices.
It depicted business investment as having slowed, dowgrading its assessment from the December meeting.
Economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the central bank said in a statement.
Richmond Fed President Jeffrey Lacker, an inflation hawk who rotated into a voting seat this year, dissented against the decision. He preferred to omit the description of the time period for ultra-low rates.
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The Fed cometh: expect clarity on the transparent clarity being clarified
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Comments »The Federal Reserve will release its latest policy statement tomorrow afternoon, shortly after which Chairman Ben Bernanke will hold his quarterly press conference. Unlike the obfuscation that characterized the Greenspan era, Chairman Ben loves to verbally get down with the common man, becoming increasingly transparent as his term has progressed.
Increased openness isn’t the only change at the Fed. This is the first meeting for two new voting FOMC members as well as the launch of a program in which each voter actually gives their own economic forecast. “It’s a lot of new information from the Fed,” understates Jim Bianco, president of Bianco Research, in the attached clip.
Given how closely every utterance from the Fed is scrutinized, the increased transparency is apt to be a mixed blessing for traders, at least in the near-term.
“The history of Fed transparency has become very clear,” says Bianco. “Every time the Fed comes up with a new scheme to increase transparency, the market misreads it; the market reads into things that aren’t there and they overreact or they under-react.”
For less active traders the main question is whether or not “QE3” –or another round of quantitative easing– is in the cards.
Bianco says it won’t be tomorrow’s business but an additional round of the stock market’s favorite form of stimulus remains in play.
“QE3 has a less than 50% chance of happening; not completely dead but not completely on,” he predicts. Basically, another round of QE will stay in reserve just in case the economy starts slowing once more.
As for the press conference, if Bianco could hear just one thing from Bernanke it would be a definitive answer to the above-mentioned conflict between time or inflation targeting. Bianco says Bernanke is a closeted inflation target guy. That being the case, Bianco’s dream statement from Bernanke would be a definitive statement of the specific level to watch.
“If the inflation rate goes above this level we tighten, if it goes below this level we ease, and if stays in the middle we do nothing,” he says.
When economists dream, they want to know about price targeting. When traders dream, they generally want a huge knee jerk reaction so they can move to the other side. When normal human beings dream, they’d rather they didn’t have to listen to the Federal Reserve at all.
Lawsuits plague financial lender space, sow confusion
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Comments »You can almost hear the catchy notes from the musical “Guys and Dolls” as the U.S. banking sector struggles to put its troubled past behind it.
More than four years have elapsed since the bursting of a housing bubble that caused a devastating financial crisis, but its alleged victims and perpetrators—there is overlap between the categories—are still fighting over the spoils.
Federal and state regulators, consumer groups, large investors and government-owned agencies are pursuing multibillion-dollar claims against banks over the mortgage mess.
“I have never seen anything like this in my career,” the veteran lawyer Andrew L. Sandler, chairman and executive partner of Buckley Sandler, told me. “Everybody is going after each other: consumers, investors, regulators. This focus on blame rather than solutions is not going to solve the problem.”
The result: Legal issues are contributing to the disarray in the housing market, weighing down financial groups with huge provisions for potential losses and bamboozling an investor community already fretting about banks’ returns and business models.
Maybe, just maybe, in the next month or so, large lenders will finally settle most state and federal probes into alleged foreclosure improprieties. But even that long-awaited package of concessions and fines, possibly worth some $20 billion, won’t be enough to spell the end of the legal morass.
Lawsuits from the private sector will continue for years. Rules introduced since the turmoil, such as a controversial cap on debit-card fees, are spawning fresh litigation. New watchdogs, such as the Consumer Financial Protection Bureau, are sharpening their legal knives.
A Wall Street executive put it best: “Banks have become the Big Tobacco of the modern era: a large target with big pockets for people to sue.” But with much smaller margins in their core business, I would add.
Fed openness is actually very confusing
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Comments »Federal Reserve Bank of Philadelphia President Charles Plosser was answering reporters’ questions two weeks ago when he paused to seek their assistance on the Fed’s campaign to open up to the public.
“Help me out here,” Plosser said after a Jan. 11 speech in Rochester, New York. “There’s a huge confusion about this,” he said, referring to Fed plans to start releasing policy makers’ forecasts for the benchmark interest rate tomorrow.
Plosser said he was concerned investors might misinterpret the projections as a pledge to keep borrowing costs low for a specified period. That could make it harder for the central bank to raise interest rates should the need arise, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
“It’s not at all clear how people are supposed to react” to the Fed’s new communications policy, Stanley said. “If it does start to take on that sense of being a commitment,” he said, “it runs a great risk in terms of their credibility when they end up not being able to stick to it.”
The Federal Open Market Committee plans to release all 17 policy makers’ rate projections for the fourth quarter of 2012, the next few years and the long run, as well as an explanation for their assessments. The Fed will provide the information at the conclusion of a two-day meeting tomorrow. The FOMC convened today at about 10 a.m.
Views Voiced
The decision to announce the projections is the latest effort by Chairman Ben S. Bernanke to increase openness and public understanding of the Fed. Since becoming chairman in 2006, Bernanke has begun holding regular press conferences and voiced his views in television interviews and at town hall meetings. He’s also announced forecasts on economic growth, unemployment and inflation four times a year, up from twice annually under his predecessor, Alan Greenspan.
Chicago Fed President Charles Evans, who this month reiterated his call for adding more stimulus, said on Jan. 13 that the central bank’s “enhanced communications” mark a “substantial, first-order improvement” over the Fed’s previous efforts. Publishing the projections will help the public better evaluate the committee’s views, while allowing monetary policy to “respond more strongly in the medium-term when adverse economic shocks impede growth and employment,” he said.
Policy makers want to telegraph their expectations for the appropriate path for the overnight lending rate between banks, Plosser said. That shouldn’t be confused as a commitment on the level of interest rates.
