Banking Law Prof Blog

Hot Off the Press: FOMC Statement Today

The Federal Reserve's Federal Open Market Committee (FOMC) met today and announced a unanimous vote to keep the target federal funds interest rate where it its:  0% to 1/4%.

The FOMC Statement indicated that economic activity has picked up after the severe downturn. 

The announcement also discussed current steps anticipated with respect to the Fed's assistance to the U.S. housing market through purchasing mortgage-backed securities:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009." 

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090923a.htm  

Link to AP Story:  http://news.yahoo.com/s/ap/20090923/ap_on_bi_ge/us_fed_interest_rates

(ag) Sept. 23, 2009, in Economy/Interest Rates

Today's FOMC Statement: The Fed's Interest Rate and Liquidity Plans

The Federal Reserve Board's Federal Open Market Committee ("FOMC") issued a statement today announcing that it would keep the target federal funds interest rate range between 0% and 1/4% and that "exceptionally low levels of the federal funds rate for an extended period." 

The FOMC also announced plans to pump more liquidity into the financial system.  The Federal Reserve will purchase up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed will also buy $300 billion of Treasury securities.

The FOMC Statement does indicate that it has an exit strategy in its decision "to gradually slow the pace of these transactions [anticipating] that the full amount will be purchased by the end of October."

(ag) Aug. 12, 2009, in Economy

Federal Open Market Committee Statement Today

The Federal Open Market Committee (FOMC) of the Federal Reserve, the group responsible for setting target federal funds interest rates issued a statement today, announcing that the target interest rate would remain unchanged -- between 0 and 1/4 %.  Rates are expected to stay "exceptionally low"  for "an extended period." 

The vote for this FOMC decision was unanimous.  Members of the FOMC are:  Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

The FOMC statement also states that "the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn."

In the FOMC's estimation, "the pace of economic contraction is slowing."

Link to Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm

(ag) June 24, 2009, in Economy/Interest Rates

Another Rate Cut & More Liquidity Issues

The Federal Open Market Committee (FOMC) reduced the target federal funds rate another 25 basis points to 2% on Wednesday. 

Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Federal Reserve Bank Charles Prosser opposed this rate cut.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20080430a.htm

The Federal Reserve continues to battle the liquidity crunch in other ways as well.  Today, the Federal Reserve announced an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, beginning with the auction on May 5. This increase will bring the amounts outstanding under the TAF to $150 billion.  In response to the global nature of the liquidity crisis, the Swiss National Bank and the European Central Bank are working in cooperation with the Federal Reserve.

Link:  http://www.federalreserve.gov/newsevents/press/monetary/20080502a.htm

(ag) May 2, 2008, in Economy/Interest Rates

Reviewing the Fed's Interest Rate Cuts

Are the interest rate cuts by Federal Reserve Board's Federal Open Market Committee (FOMC) producing the intended results? You be the judge.

Members of the FOMC for 2008

• Ben S. Bernanke, Board of Governors, Chairman
• Timothy F. Geithner, New York, Vice Chairman
• Richard W. Fisher, Dallas
• Donald L. Kohn, Board of Governors
• Randall S. Kroszner, Board of Governors
• Frederic S. Mishkin, Board of Governors
• Sandra Pianalto, Cleveland
• Charles I. Plosser, Philadelphia
• Gary H. Stern, Minneapolis
• Kevin M. Warsh, Board of Governors

Federal Reserve Chairman Ben Bernanke

List of FOMC interest rate adjustments in reverse order:

March 18, 2008 - Target federal funds rate reduced 75 basis points - from 3% to 2.25%.  FOMC Statement indicates weakened economic activity, financial markets under stress, and deepening of housing contraction on the one hand and increased inflation on the other.  Two FOMC members, Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Federal Reserve Bank President Charles Plosser,  dissented from this action, arguing that 75 basis points was too aggressive.

Dallas Fed President Richard Fisher

Philadelphia Fed President Charles Plosser

January 30, 2008 - Target federal funds rate reduced  50 basis points from 3.5% to 3%.  Dallas Fed President cast the sole dissenting vote, preferring no reduction at this time.

January 22, 2008 - Target federal funds rate reduced in an unscheduled FOMC meeting 75 basis points from 4.25% to 3.5%.  William Poole voted against this reduction and Frederic Mishkin was absent.

December 11, 2007 - Target federal funds rate reduced 25 basis points from 4.5% to 4.25%.  Eric Rosengren  voted against this reduction, preferring to reduce the rate by 50 basis points.

October 31, 2007 - Target federal funds rate reduced 25 basis points from 4.75% to 4.5%.  Thomas Hoenig voted against this reduction, preferring no change at this time.

September 18, 2007 - Target federal funds rate reduced 50 basis points from 5.25% to 4.75%, pursuant to unanimous vote.

August 17, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.  FOMC Statement says, "The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

August 7, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.

June 28, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.

May 9, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.

March 21, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.

January 31, 2007 - Target federal funds rate unchanged from 5.25% pursuant to unanimous vote.

December 12, 2006 - Target federal funds rate unchanged from 5.25%.   Jeffrey Lacker voted against, preferring to raise rates 25 basis points.

October 25, 2006 - Target federal funds rate unchanged from 5.25%.  Jeffrey Lacker voted against, preferring to raise rates 25 basis points.

September 20, 2006 - Target federal funds rate unchanged from 5.25%.  Jeffrey Lacker voted against, preferring to raise rates 25 basis points.

August 8, 2006 - Target federal funds rate unchanged from 5.25%.  Jeffrey Lacker voted against, preferring to raise rates 25 basis points.

June 29, 2006 - Target federal funds rate raised 25 basis points from 5% to 5 1/4%, pursuant to unanimous vote.

May 10, 2006 - Target federal funds rate raised 25 basis points from 4.75% to 5%, pursuant to unanimous vote.

March 28, 2006 - Target federal funds rate raised 25 basis points from 4.5% to 4.75%, pursuant to unanimous vote.

January 31, 2006 - Target federal funds rate raised 25 basis points from 4.25% to 4.55%, pursuant to unanimous vote.

___

(ag) March 26, 2008, in Economy/Interest Rates

Chairman Bernanke Reports to Congress

Today, Federal Reserve Board Chairman Ben Bernanke presented the Semiannual Monetary Report to Congress before the House Financial Services Committee.  Most of the report discussed the deteriorating economy, noting that the Fed's balancing act now tips toward encouraging economic growth rather than  dampening inflation.  The Fed is striving to implement monetary policy "properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures."

Sluggish economic activity in the near term is almost a dead certainty.  There is substantial risk that " the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."  Consumer price inflation has increased, so although Bernanke did not say it, we could be headed for a bad combination of stagnant economy + inflation = stagflation.

Bernanke noted that "monetary policy works with a lag," so it will be some time before we can determine whether the FOMC's aggressive reductions in the target federal funds rate of 225 basis points since last summer are accomplishing the desired results.

Other reportable items include:  1.  The Fed's proposed HOEPA regulations on which comments are still being received and evaluated.  After much berating by Congress, the Fed finally did get around to formulating proposed HOEPA changes.  2.  The Fed is engaged in informal encouragement to lenders to work with borrowers facing foreclosure.   It is difficult to make this sound impressive.  3.  Final Truth in Lending Act Rules should be forthcoming.  New credit card disclosures will be part of those rules.  4.  Separately, the Fed plans to use Federal Trade Commission Act authority to issue rules regarding unfair and deceptive practices by credit card issuers.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/bernanke20080227a.htm

Link to other viewpoints about the testimony:  http://www.forbes.com/markets/feeds/afx/2008/02/27/afx4705136.html

(ag) Feb. 27, 2008, in Economy/Interest Rates

FOMC Minutes Available

Federal Open Market Committee (FOMC) minutes for two conference calls and a two-day meeting in January 2008, give us some insight into the Fed's think behind the two extraodinary rate cuts totaling 125 basis points within one week. Pressure from the financial markets overwhelmed all other considerations.  The rate adjustments appear to have been both too much and not enough.  Too much in that inflation is a very real risk and not enough in that the markets have not improved as hoped.

Link to FOMC Minutes:  http://www.federalreserve.gov/newsevents/press/monetary/20080220a.htm

See also today's Wall Street Journal front-page article, "Fears of Stagflation Return as Price Increases Gain Pace."

(ag) Feb. 21, 2008, in Economy/Interest Rates

The FOMC Cuts Again

On the heels of last week's interest rate interest rate reduction of .75%, which was a very substantial cut and one taken in an unscheduled FOMC meeting, the Federal Open Market Committee (FOMC) lowered the target federal funds rate another .5% to 3%.  Dallas Federal President Richard Fisher was the lone dissenter.

I can't resist:  The first cut may have been the deepest, but this one is not inconsequential.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20080130a.htm

(ag) Jan. 30, 2008, in 2008.

Shot in the Arm or Shot in the Head? The President's Stimulus Proposal and the Fed's Dramatic Interest Rate Cut

This morning, for the first time in memory, the Federal Reserve's Federal Open Market Committee (FOMC) reduced the target federal funds rate 75 basis points in an action taken outside its regularly scheduled meeting.  After this dramatic cut, the fed funds rate is at 3 1/2%.   The FOMC also cut the discount rate 75 basis points to 4%.  FOMC member and President of the St. Louis Federal Reserve Bank Bill Poole voted against this rate cut because he would have waited to consider this action at the regular FOMC meeting next week.

The Federal Reserve is clearly more concerned with economic stimulus than with the possibility of inflation -- although there are inflationary indicators as well.  Lowering interest rates exacerbates inflationary conditions.

Link to Federal Reserve statement:  http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm

As foreign stock indexes showed sharp declines last week and yesterday in response to fears the the U.S. subprime meltdown will lead to a U.S. recession with global impact, the Federal Reserve obviously intended to demonstrate that it will act decisively and in a substantial way to rescue the U.S. economy.  But will this action achieve its intended result?  This abrupt action could signal that the situation is worse than previously perceived and it could signal that the Fed is reacting in a panic rather than in a measured way.

On  Friday, President  Bush weighed in on the state of the U.S. economy with a call for immediate economic stimulus through a sizeable tax cut package that would take effect quickly.  Foreign markets were not soothed by this plan.

The question of the day is whether these extraordinary measures by the Federal Reserve and the President will save the U.S. from recession -- or simply indicate panic and trigger inflation.

Link to White House statement:  http://www.whitehouse.gov/news/releases/2008/01/20080118-1.html

(ag) Jan. 22, 2008, in Economy/Interest Rates

Comparing U.S. Interest Rate Adjustment Policies with those in the U.K. and the E.U.

Here is a fascinating article comparing the Federal Reserve Board's Federal Open Market Committee (FOMC) response to the now-global crisis stemming from the U.S. mortgage meltdown with the response of the Bank of England (BOE) and the European Central Bank (ECB).  The ECB may be considering raising interest rates to combat the potential for inflation.

Link:  http://archive.constantcontact.com/fs018/1101875042839/archive/1101934910245.html

(ag) Jan. 14, 2008, in Economy/Interest Rates

What They Were Thinking: FOMC Minutes

Minutes of the Federal Open Market Committee (FOMC) on Dec. 11, 2007, and a telephone meeting on Dec. 6, 2007, are available on the Federal Reserve website.  On Dec. 11th, the FOMC lowered the target federal funds rate to 4 1/4%, with one dissenting vote. The minutes reflect considerable discussion about housing market issues, financial markets, banking industry issues relating to credit risk, and projected inflation.

Link:  http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20071211.pdf

The delay between the FOMC meetings and the posting of minutes is likely meant to minimize the risk of an unintended Wall Street reaction to interest rate adjustments.  On Jan. 5, 2008, Federal Reserve Governor Donald L. Kohn discussed the communication issues surrounding Federal Reserve actions.

Link to speech:  http://www.federalreserve.gov/newsevents/speech/kohn20080105a.htm

(ag) Jan. 9, 2009, in Economy/Interest Rates

The Federal Reserve Board & the Mortgage Crisis: Using All the Tools in the Box

Last week the Federal Reserve Board pulled out all the stops to address the impact of the subprime mortgage meltdown on the financial markets and the economy.  While the Federal Open Market Committee (FOMC) lowered the target federal funds rate only 25 basis points to 4.25% rather than the more substantial cut Wall Street wanted, the Federal Reserve also lowered the discount rate from 5% to 4.75% and, on Friday, made the announcement that today (Monday, Dec. 17, 2007) it would address liquidity problems by offering $20 billion in 28-day credit through its Term Auction Facility.  This mechanism is not well known, nor is it frequently employed.  Check out the Federal Reserve Board's explanation of how financial institutions can bid for Federal Reserve advances.

Link to Dec. 11, 2007, announcement of FOMC interest rate cut:  http://www.federalreserve.gov/newsevents/press/monetary/20071211a.htm 

Links to announcements of discount rate reductions:  http://www.federalreserve.gov/newsevents/press/monetary/20071211a.htm

http://www.federalreserve.gov/newsevents/press/monetary/20071212b.htm

http://www.federalreserve.gov/newsevents/press/monetary/20071213a.htm

Link to announcement of new liquidity provision: http://www.federalreserve.gov/newsevents/press/monetary/20071214a.htm

(ag) Dec. 17, 2007, in FRB/Economy/Interest Rates

Another Interest Rate Cut

In light of the Federal Open Market Committee (FOMC) vote today to lower the target federal funds rate 25 basis points to 4.5% and to cut the discount rate 25 basis points to 5%, we conclude two things:  1.  The subprime mortgage related problems in the financial markets are deeper and will be with us for longer into the future that we could have foreseen even six weeks ago; and 2.  Distress cries from investors in these collateralized debt obligations (CDOs) do get the Fed's attention, despite previous statements that seemed to indicate reluctance to bail out investors who made poor decisions.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20071031a.htm

(ag) Oct. 31, 2007, in Economy/Interest Rates

Wall Street Bets on a Rate Cut

If the market opening this morning is any indication, the financial markets are looking for a quarter percent reduction in the target federal funds interest rate to be the outcome of the Federal Open Market Committee meeting that begins tomorrow.

Link to market report:  http://today.reuters.com/news/articleinvesting.aspx?type=hotStocksNews&storyID=2007-10-29T120534Z_01_L2468810_RTRUKOC_0_US-MARKETS-STOCKS.xml

(ag) Oct. 29, 2007, in Economy/Interest Rates

FOMC Minutes Show Unanimity

When the Federal Open Market Committee decided to cut the target federal funds rate by an unexpected 50 basis points, all members were in agreement that the action was necessary to bolster the financial markets.  Minutes of the Sept. 18, 2007, FOMC meeting are now available.

LInk:  http://www.federalreserve.gov/fomc/minutes/20070918.htm

(ag) Oct. 10, 2007, in Economy/Interest Rates

Richard Fisher Explains the Fed Funds Rate Cut

President of the Federal Reserve Bank of Dallas Richard Fisher explained the competing economic considerations the Federal Open Market Committee (FOMC) must balance as it manages interest rates in our economy.  His speech last week is, as usual, clear, understandable and interesting.

Link:  http://dallasfed.org/news/speeches/fisher/2007/fs070924.cfm

(ag) Oct. 1, 2007, in Economy/Interest Rates

FOMC Lowers Fed Funds Rate Half a Percentage Point

The Federal Open Market Committee voted today to cut the target federal funds rate from 5 1/4%, where it has remained since June 29, 2006, to 4 3/4%.  Cutting the rate by 50 basis points instead of a more modest cut of 25 basis points is a vigorous response to problems in the financial market triggered by the subprime mortgage meltdown. This is the first fed funds rate cut since June 25, 2003, when the FOMC lowered the target federal funds rate from 1 1/4% to 1%.

Federal Reserve Chairman Ben Bernanke, unlike his predecessor Alan Greenspan, had repeatedly expressed reluctance to use a federal funds rate cut as a boost to the U.S. economy which has been troubled by losses for subprime lenders and investors.  The U.S. housing market and financial markets have also been in a decline.  One problem with this rate cut is that its effects are likely to be short-lived and may be viewed as bailing out the lenders and markets that had a hand in creating the problem. In addition, the Fed is always concerned about the trade-off between keeping interest rates low enough to encourage economic growth but not so high that inflation can get out of hand.

In a related action, the Federal Reserve also lowered the discount rate 50 basis points to 5 1/4%.

The rate cuts were requested by the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

The votes on both actions were unanimous.

The discount rate is the interest rate banks pay to borrow from the Federal Reserve.  The federal funds rate is the interest rate banks charge each other for overnight loans of balances they hold with the Federal Reserve Banks.

Link to FOMC announcement:  http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm

(ag) Sept. 18, 2007, in Economy/Interest Rates

FOMC Minutes

Minutes of the Federal Open Market Commitee's Aug. 7, 2007 meeting are now available.  Remember that meeting?  FOMC members voted unanimously to maintain the target federal funds rate at 5 1/4%.  Almost immediately thereafter, the subprime mortgage market swamped the stock market with bad news from Countrywide. 

Link to FOMC Minutes:  http://www.federalreserve.gov/fomc/minutes/20070807.htm

(ag) Aug. 28, 2007, in Economy/Interest Rates

FOMC Minutes

Here's the link to the Minutes of the Federal Open Market's June 27-28 meeting, with its unanimous decision to hold the target federal funds rate constant at 5 1/4%.  As is its custom, the FOMC releases only the target rate and a short statement contemporaneous with the decision.  Minutes are publicly released three weeks after the policy decision.

The next FOMC meeting is scheduled for Aug. 7, 2007.

Link:  http://www.federalreserve.gov/fomc/minutes/20070628.htm

(ag) July 24, 2007, in Economy/Interest Rates

Sandler O'Neill's Marc Flaster Reflects on the Economy

Here's a great "state of the economy" piece and a link to Sandler O'Neill's website:

Quarterly Commentary

by Marc L. Flaster

Principle

Sandler O’Neill + Partners

www.sandleroneill.com

     An old adage of Wall Street starts with the question “What’s the difference between being early and being wrong?” The answer – there is no difference. That is not unlike the current heralds of doom and gloom who at various times have been pinning the coming economic downturn on:

·         the back of the FOMC for rising the federal funds target rate from 1% to 5.25%

·         rising prices of energy and gasoline

·         the disintegration of the subprime mortgage market

·         slowing of appreciation in household equity

·         outsourcing of jobs and production to cheaper labor sources beyond our borders, or

·         the challenge of the internet, which has enhanced consumer awareness and squeezed company profit margins.

     Each prediction received widespread media attention that subsequently degenerated into boredom and cynicism as the anticipated path of events failed to materialize:

• higher short term interest rates have not driven a proportional rise in long term rates and restrained economic activity
• energy and fuel are readily available
• fears of a meltdown in the subprime mortgage market have subsided as Bear Stearns’ hedge funds with significant subprime mortgage exposure are being liquidated in an orderly fashion
• housing is reverting back to the status of a shelter rather than a speculative  investment
• unemployment remains low by historic standards in the mid-4% range, and
• corporations have reported double digit earning increases for each of the past fourteen quarters.

     Sooner or later there will be another recession but, at the present time, the economy appears to be performing reasonably well. Nevertheless, these considerations should not be mistaken as excuses for complacency. We are both surrounded by and constantly reminded of its consequences. Detroit; Bethlehem, Pennsylvania; and Youngstown, Ohio, among other cities, have become symbols of the failure to constantly innovate. Trying harder is no longer just for #2.

     It may prove harder to sustain a position of market dominance than to first achieve a position of leadership. That is equally applicable whether measured in terms of shelf space, unit shipments or deposit market share. The new realities of 24/7 means that someone, somewhere is working while others sleep. Playing catch up is getting harder to do. Technological discovery is driving product innovation as well as accelerating creative destruction. With unemployment low at 4.5% and the Nation on wartime footing, it is hard to see a withering of its economic muscle.

     But a rising tide does not rise all ships. The “greatest generation” has slowly molted into a pension burden. Having survived the depression, fought two wars, industrialized the world and established a healthy middle class, they now wait in line for health care services, shuffle about with canes and walkers, and if healthy enough, restock the shelves at Walmart and Home Depot. Their legacy is not surviving their heritage. The greening of America has a very different meaning to this generation for the factories that they help to build and staff are now shuttered and in many cases, bulldozed back into the rubble from which they rose.

     Pension liabilities are now the largest cost to any municipal or industrial organization and almost all are under-funded.  Congress has passed a law that requires every municipality to publicly recognize its unfunded pension liability. The State of New Jersey sold a bond issue to supplement the fund while the State of Texas “opted out” and dismissed that whole idea as outrageous.

     Equally pressing is the need to take a longer term planning perspective, and to address challenges immediately before they take on lives of their own. That should be equally important for both private and public companies. I am taken aback whenever I hear of bankers who refuse to “do the right thing” and take an earnings charge for whatever reason because it would cause them to report a decrease in EPS growth for the first time in some number of quarters or years. Unlike wine, trouble spots generally do not improve with age.

     Bankers should consider:

• accelerating unamortized issuance expenses for past trust preferred offerings that are callable and take advantage of tight current market spreads to refinance them 
• taking charges to restructure the bond portfolio and improve future margins and earnings because it may be a while before bond market conditions improve, and
• “clearing the decks” before they become so cluttered that they distract management attention and impede maneuverability.

     In addition to management, the harsh realities of banking in this environment are also showing up on the doorstep of investors. Banks have to take more risk to fund projects that yield less. Quarterly reports are starting to read like creative writing exercises explaining contracting margins, problem loans, and earnings shortfalls. The pressure to take action will only build as each disappointing quarter passes. Some bank managers are doing something. To the extent they can’t generate profitable lending or growth opportunities they are refunding excess capital to the shareholders through stock buy backs and/or dividend increases, or shrinking their balance sheets to reposition the bank consistent with current realities in their markets. Those management teams that choose the right course can hold their own if not prosper in this new environment. You can’t be successful over the long term by only making short term decisions.

___________

(ag) July 20, 2007, in Economy