View Full Version : Repubs dissing Bernanke
09-20-2011, 07:46 PM
The Republicans want in on fed policy decisions.
Martin Crutsinger, AP Economics Writer, On Tuesday September 20, 2011, 7:03 pm
WASHINGTON (AP) -- Republican leaders of the House and Senate are urging Federal Reserve policymakers against taking further steps to lower interest rates.
On the eve of the Fed's two-day policy meeting, the leaders sent a letter to Fed Chairman Ben Bernanke warning that the Fed's policies could harm an already-weak U.S. economy.
The letter, sent Monday, was signed by Senate Republican Leader Mitch McConnell of Kentucky, Sen. Jon Kyl of Arizona, House Speaker John Boehner of Ohio, and House Majority Leader Eric Cantor of Virginia.
The letter followed criticism from several Republican presidential candidates that the Fed efforts to boost growth are raising the risk of inflation.
"The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy," the lawmakers wrote.
It is rare for lawmakers to try and sway policy action at the Fed, which operates independently of Congress and the White House. It was also sent at a time when Bernanke, a Republican, has faced growing criticism from members of his own party.
Former Fed official Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, called the letter "outrageous. It's incredible." He says it's been several decades since such high-level politicians tried so directly to influence the Fed.
"The fact that it's in print and signed by the leaders of the House and minority leaders of the Senate raises it up a notch," Gagnon says.
The lawmakers were responding to expectations that the Fed will announce a new step Wednesday to further lower interest rates. Republicans have been critical of the Fed's previous efforts to lower rates through the purchase of Treasury bonds.
The letter expressed serious concerns that the Fed's actions could weaken the foreign exchange value of the dollar or encourage excess borrowing by consumers who are already carrying too much debt.
Bernanke has rebuffed his critics by arguing that rates must remain near record lows to encourage lending and breathe life into the economy, which has struggled to grow more than two years after the recession officially ended.
He has acknowledged that inflation has ticked up in recent months. But he says that is mostly because of temporary factors. He expects inflation to subside in the coming months.
The comments from GOP leaders also come after Bernanke suggested Republicans in Congress should support efforts to help the economy, rather than focusing solely on deficit cutting.
09-20-2011, 09:37 PM
When did Congress become Financial experts... or the FED for that matter?
09-20-2011, 10:18 PM
Oh man I sure hope Uncle Ben listens. We certainly don't want to risk any in-flat-ion. Dunno what that is but it sounds real NOT GOOD.
Holy crap where do we get all these toolbag politicians. These clowns ever believe in anything but getting a bigger boat? Even vikings took a break from looting and pillaging once in awhile.
09-21-2011, 07:40 AM
They should have sent a him a real message. ben should have woke up next to a horse head in bed with him.
09-21-2011, 08:30 AM
Bernanke Has Few Tools to Heal Economy Amid Weak Housing......
U.S. mortgage rates are the lowest in at least four decades, with a 30-year fixed loan available at 4.09 percent. That didn’t help Alexis Wolf buy a townhome in Beaverton, Oregon.
“Unless you have family help, you’re stuck renting,” said Wolf, 26, a real estate broker who turned to relatives for a loan because she didn’t have the credit and employment history needed to qualify for a mortgage.
Wolf’s experience illustrates the predicament for Federal Reserve policy makers as they end a two-day meeting today to consider ways to boost economic growth. Low interest rates, the traditional medicine for a flagging economy, aren’t helping housing, which since 1982 has aided every recovery except the current one.
Sales of existing homes dropped in July to the lowest since November, and the median price slid 4.4 percent from a year earlier. Rising foreclosures, tighter lending standards and unemployment stuck near 9 percent for more than two years are all weighing on the market. Lower borrowing costs aren’t likely to make a difference, said housing economist Brad Hunter.
“The Fed’s actions probably won’t help housing in a meaningful way,” said Hunter, chief economist and national director of consulting at Metrostudy, a Houston-based housing research firm that provides data to 18 of the 20 largest U.S. builders. “The level of mortgage rates is not a major factor. Rates are at extremely attractive levels.”
The Federal Open Market Committee may decide today to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates for mortgages, auto and consumer loans, according to 71 percent of 42 economists surveyed by Bloomberg News.
Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. say policy makers may also choose to reduce the 0.25 percent interest rate paid on the excess reserves that banks hold at the Fed. The central bank is scheduled to issue its statement at about 2:15 p.m. in Washington.
The FOMC may say that while recent data are consistent with a rebound forecast for the second half of 2011, the weak labor market and high unemployment make more easing necessary, said Dean Maki, chief U.S. economist at Barclays Capital.
“It is hard to argue that what is holding the recovery back is the level of interest rates,” Maki said. “We have been through a massive boom-bust cycle in housing,” and working off excess inventory will “be a long, drawn-out process.”
A rebound in housing is essential for restoring the net worth of U.S. households, reviving consumer spending and strengthening the recovery, Harvard University economics professor Martin Feldstein said in a Sept. 14 interview. Neither monetary policy nor President Barack Obama’s proposed $447 billion jobs program will provide a fix, he said.
‘Month After Month’
“The most important thing that would stimulate households would be to go after the housing problem,” said Feldstein, who served as chief economic adviser to President Ronald Reagan. “We still have house prices falling month after month on a seasonally adjusted basis, and something has to be done to deal with that.”
Tougher lending standards imposed after the credit crisis are impeding a recovery in housing more than the cost of borrowing, Hunter said.
Commercial banks’ real estate loans have fallen as supervisors, including the Fed, set rules aimed at preventing excessive risk-taking and predatory lending. Those loans have dropped for 29 consecutive months, according to Fed data.
Fighting Last War
“Regulators are still busy fighting the last war and demand that bankers be ultra cautious about lending,” said Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey and a former head of monetary analysis at the Federal Reserve Bank of New York.
The Fed has held the benchmark interest rate near zero since December 2008 and expanded the central bank’s assets in July to a record $2.88 trillion. The yield on the 10-year U.S. Treasury note has declined to 1.94 percent from 4 percent in April 2010.
Still, economic growth in the first six months of this year was the weakest since the recovery started in 2009. Gross domestic product expanded at a 1 percent annual rate in the second quarter after 0.4 percent growth in the first three months of this year.
The Fed, by announcing today the lengthening in the average duration of bonds in its portfolio, would mimic a policy in 1961 known as “Operation Twist” for its goal of bending the yield curve. Within the first month, the program may push down the yield on the 10-year Treasury security by 0.15 percentage point, said Chris Rupkey, chief financial economist of Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.
“Operation Twist in the ‘60s wasn’t found to be a great success either,” said Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home- price index.
“Homeowners are relatively insensitive to mortgage rates when they are lacking confidence,” he said. “The dramatic thing that is happening now is that their job isn’t secure, if they even have one.”
Consumer confidence has fallen along with U.S. home values, which have declined by a third over the past five years, according to the S&P/Case-Shiller U.S. Home Price Index. In speculative markets like south Florida, home values have tumbled by half. During just the past 12 months, the value of real estate assets has declined by $947 billion.
Consumer confidence has ebbed to the second-lowest level of the year as the most households in three years said it is a bad time to spend. The Bloomberg Consumer Comfort Index was minus 49.3 in the period to Sept. 11, near this year’s low of minus 49.4 reached in May.
“The essence of the problem is there’s no confidence in what’s next with the economy,” Jeff Lazerson, president of Mortgage Grader Inc., a mortgage broker based in Laguna Niguel, California, said in a telephone interview. “Borrowers are unemployed or worried about losing their job. Even rich guys feel poor when the stock market goes down.”
The Standard & Poor’s 500 Index has lost 4.4 percent this year, closing yesterday at 1,202.09 in New York. Net worth for households and non-profit groups decreased by $149 billion in the second quarter, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said Sept. 16.
Wolf, the real estate broker and Oregon homebuyer, said a Fed program to push down interest rates probably wouldn’t bring her more business.
“If they were even lower, I’m not sure people jump into the market,” she said. “I don’t think they’re a function of holding people back, like unemployment or uncertainty in the economy.”
To contact the reporters on this story: Steve Matthews in Atlanta at firstname.lastname@example.org;
To contact the reporter on this story: John Gittelsohn in Los Angeles at email@example.com
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09-21-2011, 11:12 AM
The Ultimate Preparation Guide For Today's Huge Fed Announcement
Joe Weisenthal | Sep. 21, 2011, 4:22 AM
Today concludes a two-day meeting of the FOMC, after which Ben Bernanke is expected to unveil his latest trick for stimulating the economy. See, because the recovery is faltering, and because Congress is fighting with the President on fiscal matters, there's no choice but for the Fed to be the stimulator of last resort.
So what will the Fed do?
To answer that, let's back up.
Around this time last year, the Fed unveiled "QE2", a scheme by which the Fed purchased, on the open market, $600 billion of U.S. government securities with the idea of reducing interest rates and pumping more money into the economy.
The Fed balance sheet since before the crisis looks like this:
QE2 has had mixed results at best.
The most obvious knock against it is that the economy right now is veering on recession, which is the exact opposite of what you'd hope to see after a stimulus runs to completion.
On the other hand, it does seem to have been good for risk assets.
This chart from Doug Short showing the market during periods of QE would seem to suggest that stocks (at least since the crisis) have done a lot better in the periods of Fed easing, and worse (down/stagnant) when the Fed was taking a break.
How does QE lead to higher prices on risky assets? As Richard Koo of Nomura explains it, by reducing the relative value of Treasuries, investors are forced to go elsewhere, as they're essentially squeezed out of those positions. What QE doesn't and hasn't done is stimulate lending, because at a time when the private sector has too much debt, making money cheaper does little good.
And at this point, Ben Bernanke actually seems to be coming around on this idea.
In a speech earlier this month that was seen as a warm-up to this meeting, the Fed chairman mostly talked about the need for more fiscal policy. He seems to grasp that in a balance sheet recession, where the primary thing that's happening is the private sector paying down debt, making money cheaper isn't a compelling tool.
But he also seems to think that doing nothing isn't a good option either, which is why at the last meeting the Fed did signal a willingness to do more if necessary.
So what will the Fed do?
Most likely, and this is based on analyst estimations as well as smoke signals from the Fed, it will do what people are calling Operation Twist. The idea: Don't do any net new purchases of Treasuries (in other words, keep the Fed portfolio at nominally the same size), but dump shorter-duration bonds and buy longer ones to help further keep long-rates (which have a greater effect on loans, etc.) lower.
The name is from the 1960s when the Fed did the same thing during the Kennedy administration while the twist was a popular dance. Actually according to economist Eric Swanson, in his paper Let's Twist Again (.pdf), it was actually originally called Operation Nudge, and was ex-post facto renamed Operation Twist after the dance.
According to Swanson's paper, the operation did have a meaningful effect on lowering yields.
From his abstract:
This paper undertakes a modern event-study analysis of Operation Twist and uses its eﬀects to estimate what should be expected for the recent quantitative policy announced by the Federal Reserve, dubbed “QE2”. We ﬁrst show that Operation Twist and QE2 are similar in magnitude. We identify six signiﬁcant, discrete announcements in the course of Operation Twist that potentially could have had a ma jor eﬀect on ﬁnancial markets, and show that four did have statistically signiﬁcant eﬀects. The cumulative eﬀect of these six announcements on longer-term Treasury yields is highly statistically sig- niﬁcant but moderate, amounting to about 15 basis points.
But the 1960s economic situation was pretty different. So what do people expect now?
Well, above we noted that Ben Bernanke is losing faith in monetary policy, and it seems the market is too. Stocks have been rallying a bit heading into this week, but as Bank of America recently noted, none of the normal yield curve indicators, that would signal an increase in inflation expectations—which is what you'd hope to see if the Fed were capable of stimulating growth—have been particularly active.
Bear in mind, the operation twist prediction isn't set in stone.
For example, Nomura's rate strategist George Goncalves is actually skeptical that we'll get much of anything:
Overall market expectations seem to be for some form of Operation Twist at the FOMC meeting, but we think those looking for front-end selling could be disappointed. Sovereign concerns in the eurozone have the potential to snowball into a European (or global) banking crisis and the potential impact of sovereign default could be catastrophic. We continue to argue that if things are that bad in the world the Fed should skip operation twist and IOER cuts and instead go ahead with QE3 as risk markets seem to be falling off the QE wagon again (or at least wait for a catalyst to do so - either where the ECB adopts QE after a systemic breakdown and/or the US economic data worsen further). However, our base case as per the macro section is that no change or a minor adjustment via twist-light is the best course of Fed action as we wait for the final outcome out in Europe - all of which we believe would amount to a disappointment for the market.
Meanwhile, today Goldman presented a menu of options for the Fed. Operation Twist is just one of them. Other possibilities include a big change to the language (making more explicit statements about how long rates will be kept low, or possibly an elimination of the Fed's paying interest on excess reserves, the idea being that if you stopped paying bank to hold cash at the Fed, they'd more likely to make more loans (That one sounds compelling, but there are major drawbacks and doubts about its efficacy).
Consistent with the doubts about what tool the Fed will unveil, there is also a lot of confusion about what market response we might see. Today Morgan Stanley warned of a "powerfully negative" reaction of the Fed disappoints by being too hawkish.
Also today, Citi's FX guru Steven Englander talks about the wide dispersion of expectations:
Most analysts expect neither an announcement of, nor a commitment to, QE3. However, in recent conversations and client visits there appears to be a staunch minority of investors who feel that the Fed will not limit itself to ‘twist’, as there are concerns over the degree of its likely effectiveness. In terms of FX, a QE3 announcement would be a surprise on the dovish side and would be USD negative. Investors are primed to sell USD on any QE-type balance sheet expansion.
It is less clear how FX will react if our economists’ expectations for $500bn of twisting and no QE3 plays out. Our recent discussion with FX investors suggests to us that there will be tail disappointment on this outcome and that might outweigh the impact of the marginally more aggressive active rather than passive terming out. For FX investors we would view that combination as small risk-off.
It does not seem likely that the FOMC will agree on a well-defined definition of the Fed’s inflation and employment target that can be used to define a conditional policy rule. If the Fed did, it would be seen as a potentially dovish shift by the FX market. An unemployment rate that is stuck above 9% could be seen as acquiescing to an inflation rate well above the 2-3% range that even the doves so far limited themselves to.
On the margin this would be viewed as USD-negative and positive for commodity currencies in particular. However, it seems more likely that the discussion around formalizing the targets will take longer and be more contentious than a couple of weeks of discussion can resolve.
The announcement will come out sometime around 2:15 PM ET Wednesday.
To keep you excited, here's the best twist scene in all of movies.
Read more: http://www.businessinsider.com/preview-of-the-fed-meeting-and-operation-twist-2011-9?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Money+Game+Select&utm_campaign=MoneyGame+Select+2011-09-21#ixzz1YbGCViHE
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