Posts Tagged ‘Federal Open Market Committee’

Bernanke Talks Tough on Bank Regulation

Wednesday, May 18th, 2011

The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke.   “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference.  “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said.  The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.

Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said.  Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems.  If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.”  As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.”  Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight.  When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened.  According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.

Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance.  “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said.  “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”

Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies.  “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.

Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally.  Some are working to cut funding for agencies established by the law and limit the scope of new rules.  According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.

Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”

To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.

The Fed Sends 19 Biggest Banks Back to the Treadmill

Wednesday, March 30th, 2011

The Federal Reserve‘s second round of stress tests requires the 19 largest U.S. banks to examine their capital levels against a worst-possible-case scenario of another recession with the unemployment rate hovering above 8.9 percent. The banks were instructed to test how their loans, securities, earnings, and capital performed when compared with at least three possible economic outcomes as part of a broad capital-planning exercise.  The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans in January.  The Fed will complete its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,'” said Jonathan Hatcher, a credit strategist at New York-based Jefferies Group Inc.  Regulators don’t want to see banks “come crawling back for help later,” he said.

The review “allows our supervisors to compare the progress made by each firm in developing a rigorous internal analysis of its capital needs, with its own idiosyncratic characteristics and risks, as well as to see how the firms would fare under a standardized adverse scenario developed by our economists,” Fed Governor Daniel Tarullo said. Although Fed policymakers aren’t predicting another slump any time soon, they want banks to be prepared for one.  In January, the Federal Open Market Committee forecast a growth rate of 3.4 percent or more annually over the next three years, with the jobless rate falling to between 6.8 percent and 7.2 percent by the 4th quarter of 2013.  Unemployment averaged 9.6 percent in the 4th quarter of 2010.

The new round of stress tests are being overseen by a financial-risk unit known as the Large Institution Supervision Coordinating Committee (LISCC).  The unit relies on the Fed’s economists, quantitative researchers, regulatory experts and forecasters and examines risks across the financial system.  Last year, the LISCC helped Ben Bernanke respond to an emerging liquidity crisis faced by European banks.  “The current review of firms’ capital plans is another step forward in our approach to supervision of the largest banking organizations,” Tarullo said. “It has also served as an occasion for discussion in the LISCC of the overall state of the industry and key issues faced by banking organizations.”

At the same time, Bernanke expressed his support for the Dodd-Frank Act, which will add new layers of regulation to the financial services industry, as well as the Consumer Protection Act. “Dodd-Frank is a major step forward for financial regulation in the United States,” Bernanke said, noting that the Fed is moving swiftly to implement its provisions.  Additionally, the Fed wants banks to think about how the Dodd-Frank Act might affect earnings, and how they will meet stricter international capital guidelines.  Banks will have to determine how many faulty mortgages investors may ask them to take back into their portfolios.  Standard & Poor’s estimates that mortgage buybacks could carry a $60 billion bill to be paid by the banking industry.

In the meantime, the big banks are feeling adequately cash rich to pay dividends to their stockholders.  Bank of America’s CEO Brian T. Moynihan said that he expects to “modestly increase” dividends in the 2nd half of 2011.  “We’d love to raise the dividend,” James Rohr, CEO of PNC, said.  “We’re hopeful of hearing back in March from the regulators.”  JPMorgan CFO Douglas Braunstein told investors that the bank asked regulators for permission to increase the dividend to 30 percent of normalized earnings over time.  Braunstein said that JPMorgan’s own stress scenario was more severe than the Fed’s, and assumed that the GDP fell more than four percent through the 3rd quarter of this year with unemployment peaking at 11.7 percent.

Clive Crook, a senior editor of The Atlantic, a columnist for National Journal, and a commentator for the Financial Times, believes that United States fiscal policy itself merits examination.  Writing in The Atlantic, Crook says that “Fiscal policy needs a hypothetical stress test, just like bank capital.  Let’s be optimistic and suppose that the deficit projections do hold, and that a debt ratio of 80 percent can be comfortably supported at full employment.  What happens when we enter the next recession with debt at that level?  Assume another really serious downturn, and another 30-odd percentage points of debt.  Worried yet?  That’s why the problem won’t wait another ten years, and why sort-of-stabilizing at 80 percent won’t do.”

Economic Recovery Picking Up Steam

Monday, January 17th, 2011

Economic Recovery Picking Up SteamTreasuries were little changed after the minutes of the Federal Reserve’s last meeting confirmed that policymakers believe that economic growth is gaining traction.   Fed officials, however, believe that the economic gains were “not sufficient” to curtail their plans to buy $600 billion in U.S. debt to encourage employment in a stimulus strategy called quantitative easing (QE2 for those with a sense of humor).

“In general, Fed policymakers think the economic recovery is gaining a little bit of momentum, although the pace is a little bit slow,” said Alex Li, a New York-based interest-rate strategist at Deutsche Bank AG.  “There are certainly some concerns about the economy gaining momentum — concerns from Treasury investors.  That added a bearish tone to the Treasuries market.”

Five-year note yields rose one basis point, or 0.01 percentage point, to 2.01 percent in New York, according to BGCantor Market Data.  Ten-year note yields were slightly changed at 3.33 percent after rising to 3.37 percent.  “The Fed will have to see good growth for more than a one- or two-month period to alter their views on QE2,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “They have a high threshold.”

The nation added 140,000 jobs in December, after a rise of 39,000 in November, according to the median forecast in a Bloomberg News survey of 74 economists.  Orders at American manufacturers unexpectedly rose 0.7 percent in November, after falling 0.9 percent in October, according to data from the Commerce Department.

The $858 billion bill that President Barack Obama signed December 17 extending tax cuts for two years prompted speculation that federal borrowing needs to stay stable or increase.

The Fed is buying U.S. debt every day this week in the quantitative easing program.  In fact, it purchased $1.62 billion worth of Treasury Inflation Protected Securities that mature between July of 2012 and February of 2040.

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.

Is the Fed About to Hike Its Federal Fund Rates?

Wednesday, May 12th, 2010

Economists can’t decide if inflation will force the Fed to raise its interest rate.  The recent release of minutes from the Federal Reserve’s March meeting may hint that the nation is experiencing a sustainable recovery and is possibly facing upwards inflationary pressure.  The yield on 10-year Treasury notes has already surpassed four percent for the first time since last June; oil and copper traded at their highest prices in 18 months.

With Labor Department data showing increased private-sector hiring (the fourth time in five months), some traders are betting that the Fed will have to raise its target federal-funds rates to 0.5 percent by November.  Even so, Fed Chairman Ben Bernanke doesn’t appear to be in a hurry to increase interest rates too quickly for fear of putting the brakes on the economic recovery at a time when the unemployment rate is hovering around 10 percent.  Job openings climbed in several sectors of the economy in February, including retail, manufacturing, transportation, restaurants and hotels, according to the Labor Department.

“In the market’s mind, the Fed is always about to hike,” said Ethan Harris, chief economist at Bank of America Merrill Lynch.  “But the Fed is in a very different mindset right now.”  Harris expects the Fed will raise its interest rate to one percent at the end of 2011.  Doug Roberts, chief investment strategist at Channel Capital Research, agrees.  “Concern with unemployment, which is expected to decrease slowly at best, indicates rates may remain low for much longer than people anticipate unless we get inflationary pressures,” Roberts said.

Fed Plans to Stay the Course

Thursday, January 21st, 2010

A Federal Reserve official predicts that 2010 will see a continuing moderate economic recovery withFederal Reserve plans to maintain its nearly zero interest rate policy for the time being.  interest rates kept “exceptionally low” to encourage job creation.  Elizabeth Duke, a Fed governor, said “In the current environment, the Federal Open Market Committee (FOMC) continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  Such policy accommodation is warranted to provide support for a return over time to more desirable levels of real activity and unemployment in the context of price stability.”

The Fed slashed interest rates to nearly zero in December 2008 in reaction to the worst recession in 70 years, and created other emergency lending facilities.  Speaking to the Economic Forecast Forum in Raleigh, NC, Duke pointed out that recent data on production and spending indicate that economic activity increased at a “solid rate” during the 4th quarter of 2009.

Duke was quick to point out that credit remains tight for businesses; she believes that continued growth is dependent on additional progress in fixing financial markets and re-establishing the flow of credit to households and small businesses.  The Fed will adjust policy if any changes occur in economic conditions.  According to Duke, the Fed has “a wide range of tools for removing monetary policy accommodation when that becomes appropriate.”

Bernanke Report to Congress: Signs of Stabilization

Friday, July 24th, 2009

In his semi-annual testimony before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said that although the economy is exhibiting “tentative signs of stabilization,he plans to maintain a “highly accommodative” monetary policy for the time being.  According to Bernanke, “The pace of decline appears to have slowed significantly.  In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”

A Fed report related to Bernanke’s testimony notes that policy will be “tightened” as the labor market improves, as the economic recovery begins and as pressures limiting inflation “diminish”.  Bernanke also defended the central bank’s moves to restore financial stability and urged lawmakers to make plans to rein in the deficit.  The Federal Open Market Committee is keeping interest rates “exceptionally low”, with the benchmark lending rate in the zero to 0.25 percent range.

bernankefaithThe Fed is planning to purchase as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt by the end of 2009, and $300 billion in long-term Treasuries by September.  Bernanke believes that some of these assets may remain on the Fed’s books for an undetermined period of time.

“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” Bernanke noted. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.”

Bernanke’s comments point to the enormous influence of the Fed worldwide, not least of which is countries pegged to the U.S. dollar – like Kuwait – or that claim the dollar as their currency – like Panama.