Posts Tagged ‘Fed’

Fed Likely to Act Anew to Stimulate the Economy

Wednesday, November 3rd, 2010

Regional Federal Reserve presidents are pushing for action to avoid deflation.  The Federal Reserve is considering new action to simultaneously stimulate the economy and prevent the possibility of deflation.  Charles Evans, President of the Chicago Fed, recently said that the central bank needs to act to prevent the inflation rate from falling, saying the U.S. economy faces a “bona fide liquidity trap” and that additional accommodation is not even a “close call.”  Boston Fed President Eric Rosengren, agrees, noting “insuring against the risk of deflation may be cheaper than” attempting to deal with it once it becomes a reality.

Fed Chairman Ben Bernanke is working with the Federal Open Market Committee (FOMC) to devise a strategy to purchase additional assets aimed at averting deflation and cutting the nine percent unemployment rate, noting that there is a “case for further action.”  Evans supports a “reasonable period of time” as long as it is communicated “regularly and often” to the public.  This type of policy would complement large asset purchases and represent a change to the FOMC statement that they will keep interest rates close to zero for “an extended period.”

“The central banks of the world, including ours, have been on an inflation targeting regime and moving to a brand new regime like that is quite difficult to blame,” said Alan Blinder, formerly a Fed Vice Chairman and currently a Princeton economist.  The action poses “the danger of undermining credibility.”  Other Fed officials are worried that the expectation of lower inflation will become a self-fulfilling prophesy.  That might impede demand by increasing the cost of borrowing money.

Pre-Crisis Credit Levels Will Return Slowly

Wednesday, August 4th, 2010

 Fed Governor Elizabeth Duke says full recovery from the recession will take time.  As the nation gradually recovers from the Great Recession, several years are likely to pass before lending returns to pre-crisis levels, according to Federal Reserve Governor Elizabeth Duke.  The return of credit growth is far slower than during any business cycle of the last four decades with the sole exception of the 1990 – 1991 recession.  At that time, consumer credit required three years and commercial real estate nearly nine years to recover, Duke said in a recent speech.

Since December of 2008, the Fed has kept its target interest rate at zero to 0.25 percent in an effort to reduce the cost of borrowing and help the economy recover from the Great Recession.  Even so, loans held by commercial banks slid by approximately five percent in 2009.  “Just as the causes for the decline in lending are multifaceted and complex and took time to evolve, the solutions will likely be equally difficult and will take time to fully work,” Duke said.  She is the sole former commercial banker to serve on the Fed’s Board of Governors.  “We at the Federal Reserve, meanwhile, will continue to do everything we can to encourage a return to a healthy credit environment.”

According to data released by the Federal Reserve, consumer borrowing increased in April for the first time in three months.  The Fed’s Open Market Committee notes that household spending is restrained by “high unemployment, modest income growth, lower housing wealth and tight credit.”  Duke said that “Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while.  Household net worth dropped about 25 percent during the crisis, about 20 percent of mortgage borrowers lack equity in their homes and consumers are quite burdened by debt payments.”

First CMBS Under TALF Is on the Horizon

Monday, November 9th, 2009

first-cmbs-under-talf-is-on-horizonThe markets are keeping a close eye on a transaction that may jump start the commercial property debt market, even though the Federal Reserve has expressed some uneasiness with the deal.  If the transaction is successful, it could pave the way for the initial sale of commercial mortgage-backed securities (CMBS) under the government Term Asset-Backed Securities Loan Facility (TALF).  The credit-hungry commercial real estate industry is hoping that the debt sale by shopping center owner Developers Diversified Realty Corporation will lead to additional CMBS sales.

Developers Diversified has obtained a $400 million loan from Goldman Sachs Group, Inc., which is intended to be converted into a CMBS offering through TALF.  The Fed, keeping the taxpayers’ best interests in mind, has reservations about financing the transaction since it involves a single borrower.  These are considered riskier than deals involving multiple borrowers, where the risk is spread over different borrowers, building type and even location.

“The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse,” said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm.  Currently, the Fed is reviewing the transaction, which involves 28 shopping centers with stable cash flows.  If the Fed says “no” to the transaction, Goldman Sachs is said to be considering selling the $400 million loan outside TALF.

TALF was created to revive the CMBS market, as well as jump start securitized debt markets by offering low-cost financing from the Fed so investors can once again purchase these securities.  The program lets investors borrow as much as 95 percent of the bonds’ value by pledging the securities as collateral – meaning the risk is on taxpayers if there is a default.

Fed Chairman Ben Bernanke Likely to Keep His Job

Wednesday, September 2nd, 2009

Federal Reserve chairman and Great Depression scholar Ben Bernanke will stay in his job for another four years if President Barack Obama gets his way.  There likely will be some contentious moments during the reconfirmation hearings as Senators grill him about bailing out Wall Street institutions deemed too big to fail.  He is expected to stay on.bernanke__150184gm-a

Former Fed governor Randall Kroszner, who resigned his post to return to the University of Chicago, believes that the president has made the right choice and that Bernanke’s “amazing and steady” leadership rescued the nation from a second Great Depression.  Mark Calabria, a policy scholar at the libertarian Cato Institute, disagrees and opines that Bernanke’s renomination “sends the worst possible message”.  Still, most experts think that retaining Bernanke is a smart move, especially now that the economy and financial markets are stabilizing.  “Love him or hate him, there’s strength in continuity,” says money manager Douglas Nardi of Legg Mason Investment Counsel.  “Things are going pretty well, and you don’t want to rock the boat.”

Bernanke faces some rough months ahead.  He will have to start pulling money out of the system that he flooded with cash last fall.  This is a judgment call full of political peril, because it could mean slowing economic growth to control inflation – even if unemployment is still hovering around the 10 percent mark.  In Kroszner’s opinion, Bernanke is significantly farther along in this process than the general public realizes.  The Fed provided approximately $1.5 trillion in short-term loans as of the end of last year, which helped keep swaps, commercial paper and other institutional markets from shutting down completely.

Economic Free Fall Slows During Second Quarter of 2009

Friday, August 7th, 2009

Finally, there’s encouraging news on the economic front.  The economy declined just one percent during the second quarter of 2009, a rosier report than was expected.  It is the strongest signal so far that the longest recession since the end of World War II is easing its grip.

In a report issued by the Department of Commerce covering the quarter from April through June, the one percent drop in the GDP stands in stark contrast to the 6.4 percent free fall thatpromoting_sustainable_economic_growth characterized the first quarter of 2009.  That was the biggest decline in almost 30 years.  The economy shrank for four straight quarters for the first time since 1947, evidence of how severely the recession has hurt consumers and companies.

“The recession looks to  have largely bottomed in the spring,” said Joel Naroff, president of Naroff Economic Advisors.  “Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer.”

Fed Chairman Ben Bernanke believes the recession will end towards the end of the year.  The Obama administration’s stimulus program that combines tax cuts with government spending enhanced second quarter economic activity.  Economists believe the stimulus will have a greater impact through the second half of the year, and even in 2010.

The job market is expected to remain weak.  The current 9.5 percent unemployment rate marks a 26-year high, and the Fed expects it to top 10 percent by year’s end.  Companies will remain cautious about hiring until they are convinced that the recession is officially in the past.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.

There’s Method in Warren Buffett’s Madness

Wednesday, May 20th, 2009

Warren Buffett’s loyal followers are wondering what got into the Oracle of Omaha6a00d834a6138369e200e54f0aa7a68833-500wi when he told CNBC  that this is “a great time to be in banking“, praised Wells Fargo’s massive earning power, and said that the government doesn’t need to provide capital to or nationalize banks.

Although some critics dismissed Buffett’s statements as biased because he owns large stakes in Wells Fargo and U.S. Bancorp, he may be dead right.

Buffett was talking about lending, and it’s the “spread” that counts – the difference between the interest rates banks charge for the loans they make and the rate they pay to borrow that money.  When the Federal Reserve makes deep interest rate cuts, spreads widen and loans become more profitable.  The Fed funds rate is so low right now that Wells Fargo is borrowing cheaply and profiting handsomely on the loans it makes.

Although banks do need to recapitalize, they currently are saving money by cutting dividends paid to investors.  Every dollar they make goes into recapitalization.  With stricter government oversight, banks are required to operate more efficiently.  The irony is that these conditions are almost identical to what helped the nation recover from its last banking crisis during the 1990 – 1991 recession.  In fact, the banks 19 years ago were in worse shape than they are today; yet they were not nationalized or put into receivership.  Once the Fed cut interest rates, banks’ lending policies became more conservative, and they eventually recovered.  The same scenario could play out this time around.

A Brief History of the Fed

Monday, February 23rd, 2009

The origins of the public/private Federal Reserve Bank is the subject of a new book “Innumeracy”, by John Allen Paulos. Established in 1913 when Congress passed the Federal Reserve Act in an attempt to prevent financial panics, the Fed still had an aura of mystery. Even more curiously, the Fed’s founders knowingly created the perception that they were forming a secret society – much to the exasperation of a public that widely distrusted bankers.

One of the interesting tidbits is that the organizers traveled via private train, used assumed names, and held a hush-hush meeting on an isolated island off the Georgia coast to discuss their vision of how the Fed should be structured.

These “Lords of Finance” created the Fedfederal-reserve-building as a means to keep all money in circulation pegged to the now-abandoned gold standard, which remained in effect in the United States until 1971. In practice, this meant that someone could go to the bank and exchange (for the sake of discussion) $100 for a specified amount of gold. The standard was 23.22 grains of gold to the United States dollar. The grain is based on the weight of a grain of wheat, which translates to 1/7,000 of a pound.

The world’s first central bank is the venerable Bank of England, established in 1694 to finance Britain’s foreign wars. To this day, the so-called “Old Lady of Threadneedle Street” maintains a monopoly on issuing banknotes, and manages the nation’s monetary policy.

Homeowners Rush to Refinance While Interest Rates Are Low

Wednesday, February 18th, 2009

What recession?

A recent conversation with a friend revealed the unexpected nugget that at least one segment of the credit industry is alive and extremely well. The friend’s mortgage broker daughter is taking a leave of absence from law school to concentrate her energies on processing all the refinance applications coming her way – a torrent so great that she is currently earning commissions well into the five-figure range every week.

The downside is that this window of opportunity does absolutely nothing for people who desperately need help keeping their homes. Something needs to be done for them, too.

new_american_gothicThis rush to refinance is thanks to the Federal Reserve’s commitment to buy large blocks of mortgage-backed securities and other debt from Fannie Mae and Freddie Mac in its efforts to restart the mortgage market. Because of the Fed’s cash infusion, the benchmark 30-year fixed-rate loan fell to below five percent recently, even as low as 4.89 percent. Mortgage rates haven’t been at levels like this since the 1950s. GMAC Mortgage reports that refinance applications soared more than 75 percent in January when compared with November.

Not surprisingly, the homeowners qualifying for refinance loans aren’t struggling; they are able to pay their mortgages and see a way to save some money. According to Scott Stern, chief executive of Lenders One, “The refinance boom is mostly impacting the people who need help the least. These are people who already have conforming fixed-rate loans or government financing.”

Rising Inflation Rates Demand Caution When Investing

Tuesday, December 2nd, 2008

Inflation has returned with a vengeance, with a 1.1 percent increase reported during June – courtesy of soaring energy and food prices.  The Federal Reserve reacted to the warning signs on June 25, when it froze the Fed funds rate at two percent – ending nine months of rate cuts that it hoped would revive the shaky economy.  Right now, the Fed believes that rising food and energy costs will negatively impact the economy for several quarters to come.  Consumers agree.  A survey conducted by the University of Michigan’s Year-Ahead Inflation Survey concluded that consumers believe inflation will reach an annual rate of 5.2 next year, the highest level since 1982.  Because they feel so pinched, people will be extremely cautious with their money.

Typically in an inflationary environment, investors look to lock their capital into assets that will protect value over the long term.  However, every time the Fed hikes its overnight fund rates, it becomes more expensive for banks to lend money.  So we have the capital markets acting as a restraint against the natural cycle of surging reinvestment in an inflationary environment.  The best advice for investors seeking a haven is to focus on quality – triple-net-leased, high-credit buildings in strong markets.  These buildings will protect the value of capital and even have good prospects for appreciation.

As consumers, we have the deflationary economy until the dwindling profits hit our businesses.  What’s the best way to ease the slide?