Banking Law Prof Blog

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

Bernanke's Semiannual Testimony on the Economy

Federal Reserve Board Chairman Ben Bernanke appeared today before the House Financial Services Committee for his semiannual Monetary Report to Congress. 

Here are some highlights from his prepared testimony: 

• U.S. economic growth has proceeded during the past year at a pace consistent with sustainable expansion. 
• No surprise:  The housing sector reflects "ongoing adjustment".
• Another statement of the obvious:  "Conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans."
• The global economy continues to be strong.
• Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008.
• The unemployment rate is anticipated to edge up.
• Inflation ran at an annual rate of 4.4% over the first five months of 2007, a rate that, if maintained would clearly be inconsistent with the objective of price stability.  But core inflation (which excludes food and energy prices) may be a better guage than overall inflation.  If energy prices level off as anticipated, overall inflation should slow to a pace close to core inflation. 
• The Fed is alert to the risk that the ongoing housing correction might prove larger than anticipated, with possible spillovers onto consumer spending.  Another risk is that energy and commodity prices could continue to rise sharply, leading to increased inflation.
• The Federal Open Market Committee (FOMC) sees the upside risks to inflation as its predominant policy concern currently.
• Bernanke also discussed consumer protection initiatives, especially in the subprime mortgage lending area, which the Fed is undertaking, including "a top to bottom review of possible actions".
• Expect changes in regulations implementing Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA).

Link:  http://www.house.gov/apps/list/hearing/financialsvcs_dem/htbernanke071807.pdf

(ag) July 18, 2007, in Economy/Interest Rates

How the Fed Sees Inflation

Federal Reserve Board Chairman Ben Bernanke delivered an informative speech today at the Monetary Economics Workshop of the National Bureau of Economic Research Summer Institute, Cambridge, Massachusetts.  His topic, "Inflation Expectations and Inflation Forecasting", provides insight into how the Federal Reserve Board arrives at its views about future inflation in the U.S. economy when it calculates the appropriate target federal funds interest rate.

Link:  http://www.federalreserve.gov/boarddocs/speeches/2007/20070710/default.htm

(ag) July 10, 2007, in Economy/Interest Rates

FOMC News is No Change - Rates Continue at 5 1/4%

The Federal Open Market Committee (FOMC) today voted unanimously to maintain the target federal funds rate at 5 1/4%, citing the need to balance continued concern about the risk of inflation against the desire for adequate economic growth.

(ag) June 28, 2007, in Economy/Interest Rates

What the FOMC Was Thinking About Interest Rates

The Federal Reserve Board today released the minutes from the May 9, 2007, Federal Open Market Committee (FOMC) meeting at which the unanimous vote was to keep the target federal funds rate at 5 1/4%.

Although prior to the meeting there was some speculation about a potential rate cut in light of the housing market impact on the general economy, these minutes make it clear that the FOMC remains most concerned about avoiding inflation problems.  The FOMC acknowledges some slowing in the economy and nods to housing market issues.  The next FOMC meeting is June 27-28, 2007.

Link:  http://www.federalreserve.gov/fomc/minutes/20070509.htm

(ag) May 30, 2007, in Economy/Interest Rates

FOMC Minutes Are Now Available

Wondering what the Federal Open Market Committee (FOMC) members discussed as they reached their unanimous decision to hold the target federal funds interest rate constant at 5 1/4% ? The minutes of their March 20-21, 2007, meeting are now available:  http://www.federalreserve.gov/fomc/minutes/20070321.htm

The next meeting of the FOMC is scheduled for May 9, 2007.

(ag) April 12, 2007, in Economy/Interest Rates

Whither Interest Rates?

APRIL MONEY MEMO FOR LAWYERS - “WHITHER INTEREST RATES?”
By Ann Graham

Of course, if I had the answer to that question, I’d take up consulting and secure my fortune (and early retirement before that ephemeral prognosticating talent departed).  As a matter of fact, former Federal Reserve Chairman Alan Greenspan is attempting to do just that.  A bit more than a year after retiring from the Fed (the government agency with direct responsibility for and influence over interest rates), Mr. Greenspan is now talking publicly about his views on the economy, the stock market, and interest rates.  As a private commentator, he’s not doing that much better than other observers. 

NOW TO EXPLORE HOW INTEREST RATES WORK:
The Federal Reserve Board’s Federal Open Market Committee (“FOMC”) meets eight times a year to set the target rate for federal funds.  The twelve FOMC members include all seven members of the Federal Reserve’s Board of Governors.  Federal Reserve Governors are well-qualified and really smart economists, appointed by the President with Senate confirmation for 14-year terms -- lengthy enough to span several Presidential terms and to insulate the Board somewhat from political pressure.  The current Chairman of the Federal Reserve Board is Ben Bernanke.  Chairman Bernanke took over the reins from Alan Greenspan on February 1, 2006.  The Board Chairman and Vice-Chairman are named by the President to four-year terms. The five other FOMC members are drawn from the 12 Federal Reserve Districts.  Texas falls in the Dallas Federal Reserve’s District.  The President of the Dallas Fed is Richard Fisher – one of my heroes because of his clear and entertaining economic explanations.  (You can check out some of his speeches on the Dallas Federal Reserve Bank’s website:  http://dallasfed.org/news/speeches/fisher/index.cfm  )  Fisher doesn’t currently sit on the FOMC; this year he’s an alternate member.  The President of the New York Fed  is a permanent FOMC member because of the proximity to Wall Street. Four other District Presidents are selected in rotation to serve one-year terms on the FOMC.  For 2007, FOMC members include the Presidents of the Federal Reserve Banks of Kansas City, St. Louis, Boston, and Chicago.

At the last meeting of the FOMC on March 20-21, 2007, the FOMC voted no change for interest rates.  This decision follows previous decisions to hold federal funds target interest rates steady at 5 ¼% since August 2006.  Prior to that time, the FOMC had raised the target rates from 1%  in June 2003 through successive .25% increases at each FOMC meeting until August 2006. 
Federal funds represent the monies banks loan to or borrow from each other to satisfy short-term liquidity needs – so that interest rate is the baseline from which the interest rates on other types of loans in our national economy are derived.  When interest rates in our economy are low, individuals and businesses borrow more because the cost of borrowing is cheap compared to the returns they hope to gain from that borrowed money.  The key idea is that low interest rates encourage more investment in American businesses through the stock market, spurring economic growth. 

So why not just keep rates low all the time? When interest rates are “too low”, people can pay for and demand more goods, prices climb, and inflation sets in.  The FOMC’s job is to set the target fed funds rate at the “right level” to sustain economic growth AND restrain inflation.  That’s an art as much as a science.

One percent is an incredibly low interest rate and the “easy money” available for borrowing at low interest rates may have been one factor in the “housing bubble”.  Home prices in most regions have sky-rocketed, but now appear to be dropping and seem headed for an abrupt “adjustment” to reality.  This result is very different from the general expectation over the past few years that home prices would always increase and allow individuals to build up equity in their homes as a form of savings.  As home prices fall, people could end up owing more than their homes are worth.  So no retirement saving there – and if the borrower defaults, the lender cannot sell collateral, the home, for the principal amount of the loan outstanding, so the lender takes a loss as well.

Another interest-rate-related problem today stems from the fact that lenders seek to protect themselves from locking in low-rate 30-year residential mortgage loans, given the certainty that interest rates fluctuate.  Nowadays, many lenders offer Adjustable Rate Mortgages (“ARMs”), which reprice or undergo an interest rate change at specified time intervals – perhaps annually.  Hybrid ARMs have become a popular type of loan.  These loans, sometimes referred to as “2-28” or “3-27” loans, offer a low initial “teaser” interest rate which will be adjusted to then-current market interest rates after 2 or 3 years into a 30-year mortgage.  Well, you can see the problem.  At the low initial interest rate, there will be relatively low monthly payments, which the borrower can easily meet.  But when the loan “reprices”, the borrower is hit with “payment shock” as monthly payments increase, according to the Center for Responsible Lending’s data, up to 48%.  Wow!  No wonder home foreclosures are up.

Not only individual borrowers but the sub-prime lenders who created these difficult-to-understand loans for desperate-to-buy-a-home borrowers with less-than-perfect credit are going belly up.  New Century Financial, which crashed last month, causing major negative ripples in the U.S. stock market, is only one of many troubled sub-prime lenders.

Just as “easy money” at low interest rates contributed to the “housing bubble”, easy money poured into the stock markets world wide, driving stock prices to unrealistic levels in some Asian markets last month.  In today’s global connectedness, the harsh effects when stock prices “adjust” to more realistic levels are felt worldwide.

We’re seeing substantial concern about whether the U.S. and global economies can sustain the healthy growth experienced over the past 12 years or whether we should brace for a downturn (some even use the word “recession”).  That’s where the FOMC comes in with responsibility to use interest rates as a means to walk the tight rope so that the United States maintains economic growth rather than recession and yet avoids inflation and over-heated markets.  To achieve that balance, FOMC members review a boatload of economic data, including retail sales, employment, industrial production, core inflation, consumer spending, wages and salaries, real disposable income, residential construction and home sales, business inventories, net exports, defense spending, and sector-by-sector data, as well as data on foreign countries’ economies.  Some of those numbers may not be entirely accurate and the interplay among those factors is far from certain. 

The FOMC is expected to release the full minutes of its March meeting on April 11th.  The FOMC won’t meet again until May 9, 2007.  Previous FOMC minutes have reflected strong debate about whether to raise, lower, or maintain the target interest rate for federal funds.  The minutes will be available on the Federal Reserve website:  http://www.federalreserve.gov/fomc/ 

Although the minutes have never indicated that FOMC members had to resort to a crystal ball or Ouija Board, maybe that’s one of their little secrets.

(ag) March 26, 2007, in Economy/Interest Rates

Bernanke Talks to Congress - Reading the Tea Leaves Again

  Federal Reserve Chairman Ben Bernanke addressed the Joint Economic Committee of the U.S. Congress yesterday.  Although Bernanke indicated that the unraveling subprime lending industry and its potential problems for the economy "seem to be contained", commentators including the Wall Street Journal's gurus are noting that, "by devoting almost a full page of his seven pages of prepared remarks to the subject yesterday -- compared with one sentence in his Congressional testimony last month -- he indicated the mortgage market has become an important factor in the Fed's outlook" (quoting from Greg Ip, "Bernanke Notes Risks, But Holds to Outlook", WSJ at page A-2 (Mar. 29, 2007).

Link to Bernanke Testimony:  http://www.federalreserve.gov/boarddocs/testimony/2007/20070328/default.htm

Link to Online Today:  WSJ reporters parse Bernanke's testimony:  WSJ.com/Video

(ag) in Economy/Interest rates

Richard Fisher Gives the Insider View of FOMC Meetings -- and also discusses the imperative to "Keep Austin Weird"

Dallas Federal Reserve President Richard Fisher once again presents both important economic information and intriguing trivia.  Here's a link to a recent speech in which he gives an insider's view of what it's like to sit in on an FOMC meeting:

"[T]here are 12 Federal Reserve Banks. Eight times a year, we sit at a table with the seven governors of the Federal Reserve System in what is called the Federal Open Market Committee, or FOMC. That is where the base interest rate—the federal funds rate—is chosen and where monetary policy is set. It is done by consensus, with each participant taking part in a discussion presided over by the chairman, Ben Bernanke, who is as good and fair and smart a man as I have had the pleasure to know.

Each person at the table, starting with the 12 Reserve Bank presidents, is called on to give his or her view of the economy from their various perches. Then another round ensues, and each is asked for a recommended policy course of action: Should we hold rates steady or raise or lower them, and why? We debate language for a written statement that expresses the committee’s view. And then a tally of the preferences of the voting members is taken, and the deed is done. The vote and the statement on the vote are released by 2:15 in the afternoon.

What guides us in those discussions? An earnest intention to deliver on our congressional mandate to conduct monetary policy so as to provide sustainable noninflationary employment growth."

Check out the full text of Fisher's remarks:  http://dallasfed.org/news/speeches/fisher/2007/fs070227.cfm

(ag) March 27, 2007, in Economy/Interest Rates

The Dog That Didn't Bark

For all you Sherlock Holmes fans, Sir Arthur Conan Doyle may have something to say about interest rates.  What the FOMC did NOT say in its statement yesterday may give us a clue that's as important as the one provided to our supersleuth in "Hound of the Baskervilles". 

Previous FOMC announcements have included language that suggested that interest rate hikes might be just around the corner.  For example, in December 2006, although the decision was to hold rates steady at 5 1/4%, the FOMC announcement also said, "Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."  The December FOMC announcement also advised that FOMC member, Richmond Fed President Jeffrey Lacker, "preferred an increase of 25 basis points in the federal funds rate target at this meeting."

January's FOMC announcement said, "The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Yesterday's announcement that the FOMC had voted unanimously to maintain the fed funds target interest rate at 5 1/4% -- as it has done since August 2006, lacked that implicit warning that rate increases might loom on the near horizon.  The March 21, 2007, FOMC statement simply said, "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." No mention of firming = reduced possibility of rate increases & maybe even the possibility of rate reduction????

I love a good cup of tea leaves with my late night mystery reading.

(ag) March 22, 2007, in Economy/Interest Rates

FOMC Holds Interest Rates at 5 1/4%

The Federal Open Market Committee (FOMC) of the Federal Reserve voted unanimously today to maintain the target federal funds interest rate at 5 1/4%.  The FOMC has voted to maintain this interest level since August 2006.   

Bloomberg reports that the stock market reacted immediately and very favorably, with gains that wiped out previous losses for 2007.

The next meeting of the FOMC is scheduled for May 9, 2007.

Link to FOMC statement:  http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070321/

(ag) March 21, 2007, in Economy/Interest Rates.

Now We Know What The FOMC Was Thinking

As previously reported, the FOMC met Jan. 30 & 31, 2007, and voted unanimously to hold the target federal funds interest rate steady at 5 1/4%.  It is FOMC policy to release the Minutes of FOMC Meetings three weeks after the meeting date.  Minutes of the January meeting are now available:  http://www.federalreserve.gov/fomc/minutes/20070131.htm

(ag) Feb. 21, 2007, in Economy

Fed Funds Rate Stays at 5 1/4%

The Federal Open Market Committee voted today to hold the federal funds target rate steady at 5 1/4%.  The vote was unanimous. 

FOMC members voting were:  Ben S. Bernanke, Chairman (FRB); Timothy F. Geithner, Vice Chairman (New York); Susan S. Bies (FRB); Thomas M. Hoenig (Kansas City); Donald L. Kohn (FRB); Randall S. Kroszner (FRB); Cathy E. Minehan (Boston); Frederic S. Mishkin (FRB); Michael H. Moskow (Chicago); William Poole (St. Louis); and Kevin M. Warsh (FRB).

The FOMC is composed of the seven members of the Board of Governors (currently only 6 are serving) and five Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves on a continuous basis; the presidents of the other Reserve Banks serve one-year terms on a rotating basis beginning January 1 of each year. Each year one member is elected in each of the following groups: (1) Boston, Philadelphia, and Richmond; (2) Cleveland and Chicago; (3) Atlanta, St. Louis, and Dallas; and (4) Minneapolis, Kansas City, and San Francisco.

Link:  http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070131/default.htm

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

Poole on GSEs

St. Louis Fed President Bill Poole has three suggestions to address risks to financial stability posed by GSEs like Fannie Mae and Freddie Mac:  1.  Limit their portfolio growth; 2. Increase their minimum required capital; 3. Adopt bankruptcy legislation so that, should the worst happen, federal authorities can deal with the problem in an orderly way.

Link:  http://stlouisfed.org/news/speeches/2007/01_17_07.html

(ag) Jan. 19, 2007, in Economy

An Indication That the FOMC Won't Be Dropping Interest Rates

Richard Fisher, President of the Dallas Fed and one of my favorite economic gurus, recently outlined his views on current U.S. economic conditions to the Rotary Club in Longview, Texas.  Further proving that he is a great speaker for all venues, Fisher included his usual clear explanations laced with humor.  Check it out:  If you can wow 'em in Longview, you are definitely at the top of your game. 

In conclusion, he said, "While we at the Dallas Fed are hopeful that the measures taken to raise the federal funds rate from 1 percent to 5.25 percent will quell inflation and, very important, expectations about future inflation, we cannot yet say with conviction that we have turned the corner and have this problem fully contained. . . . .

On the inflation front, the good news is inflationary pressures appear to have reached a stasis . . .The bad news is that the stasis is at too high a level for party poopers like me who will have no choice but to advocate tightening monetary policy further if inflation does not ratchet downward.

. . . .Given all of this, I would have to say that the risk of unacceptably high inflation still outweighs the risk of substandard economic growth."

Here's my interpretation:  Absent some striking new data, look for the FOMC to hold rates steady -- or perhaps give them another nudge upward.

(ag) Jan. 16, 2007, in Economy/Interest Rates

FOMC's Lone Ranger

Here's a guy who doesn't mind being the sole voice of dissent:  President of the Federal Reserve Bank of Richmond, Dr. Jeffrey M. Lacker.  When the FOMC voted to hold interest rates steady in August, September, October and December 2006, his was the only vote to raise interest rates. 

His vote was accompanied each time with an explanation similar to the one provided in December:   "Mr. Lacker dissented because he believed that further tightening was needed to help ensure that core inflation declines to an acceptable rate in coming quarters. "

Link to Bio:  http://www.richmondfed.org/about_us/our_leaders/president/index.cfm

On another note, here's a link to a very informative speech Dr. Lacker delivered in December to the Philadelphia Fed Policy Forum:  http://www.richmondfed.org/news_and_speeches/presidents_speeches/index.cfm/id=92

This speech, entitled "How Should Regulators Respond to Fina