Federal Reserve sees slightly better 2010 economy

May 19, 2010

Fed’s new economic forecast paints brighter picture of growth and employment for rest of year

Martin Crutsinger, AP Economics Writer, On Wednesday May 19, 2010, 3:08 pm EDT

WASHINGTON (AP) — Federal Reserve officials have a slightly brighter view of the economy than they did at the start of the year.

Fed officials say in an updated forecast that they think the economy can grow between 3.2 percent and 3.7 percent this year. That’s an upward revision from a growth range of 2.8 percent to 3.5 percent in their January forecast.

The Fed’s latest forecast sees the unemployment rate, now at 9.9 percent, dipping to between 9.1 percent and 9.5 percent by year’s end. In the January forecast, the Fed didn’t think unemployment would dip below 9.5 percent this year. The Fed prepared the latest forecast for its late-April meeting.

The Fed predicts an inflation gauge tied to consumer spending — excluding volatile food and energy costs — will rise just 0.9 percent to 1.2 percent this year. In January, the officials forecast an increase in prices of 1.1 percent to 1.7 percent.

The Fed’s updated outlook was prepared at its last meeting, April 27-28, and released Wednesday. It’s roughly in line with an Associated Press survey of leading economists done about a month earlier. According to the AP’s survey, the economy will grow 3 percent this year, and the unemployment rate will inch down to 9.3 percent by year’s end.

The Fed’s new outlook represents the middle range of forecasts of officials on the Federal Open Market Committee. That’s the group of Fed board members and central bank presidents who meet eight times a year to set interest rates.

At four of those meetings, including the April session, the central bank updates its economic outlook.

The Fed left its forecasts for next year and 2011 and the longer-run expectations mainly unchanged from January.

The Fed described the changes in economic growth in 2010 as a “modest” upward revision. The minutes said the figures available for the April meeting on consumer spending and business outlays were “broadly consistent with a moderate pace of economic recovery.”

But the Fed stressed that the economic recovery is expected to remain moderate, with the unemployment rate falling only gradually.

“Participants continued to expect the pace of the economic recovery to be restrained by household and business uncertainty, only gradual improvement in labor market conditions and slow easing of credit conditions in the banking sector,” the Fed minutes said.

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Tapping The New [Extended] Home-Buyer Tax Credit

November 16, 2009

By Amy Hoak
DOW JONES

House shopping usually slows down in the winter, as people put their home searches on hold to trim the tree, buy presents to put under it and avoid the chilly weather.

This winter, however, might be different, thanks to the extended–and expanded–first-time home-buyer tax credit.

“We’re going to see far more interest in the fourth quarter than we generally do because of the tax credit,” said Heather Fernandez, vice president of Trulia.com, a real estate search engine. Traffic surged on the site on Nov. 5, the day Congress approved the credit extension, she said.

The new law extends the tax credit for first-time home buyers and opens it up to some existing homeowners as well: The credit is now 10% of the home price, up to $8,000 for first-time buyers and up to $6,500 for repeat buyers.

All buyers must have a binding contract on a house in place on or before April 30. The sale must close on or before June 30.

To be considered a first-time home buyer, an individual must not have owned a home in the past three years. And to be eligible, existing homeowners need to have lived in the same principal residence for five consecutive years during the eight-year period that ends when the new home is purchased. The credit is only for principal residences.

Income limits have risen as well. According to the IRS, the home-buyer tax credit now phases out for individuals with modified adjusted gross incomes between $125,000 and $145,000, and between $225,000 and $245,000 for people filing joint returns.

Will Credit Spur More Buyers?

The inclusion of move-up buyers might inspire homeowners to take action and list their house if they’ve been putting it off, said Carolyn Warren, a Seattle, Wash.-based mortgage broker and banker and author of the book “Homebuyers Beware.”

“If somebody loves their home, it’s not going to entice them to sell. If they’ve had it in the back of their minds and really would like to move up, it might push them into doing it sooner than later,” Warren said.

The credit isn’t expected to have as large of an effect on move-up buyers as it has on first-time buyers, according to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. The maximum tax credit is about 4% of the average purchase price for first-time buyers, but about 2% of the average purchase price for move-up buyers.

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U.S. bailout program increased moral hazard: watchdog

October 21, 2009

Wed Oct 21, 2009 1:30am EDT
By David Lawder

WASHINGTON (Reuters) – The U.S. government’s $700 billion financial bailout program has increased moral hazard in the markets by infusing capital into banks that caused the financial crisis, a watchdog for the program said on Wednesday.

The special inspector general for the U.S. Treasury’s Troubled Asset Relief Program (TARP) said the plan put in place a year ago was clearly influencing market behavior, and he repeated that taxpayers may never recoup all their money.

The bailout fund may have helped avert a financial system collapse but it could reinforce perceptions the government will step in to keep firms from failing, the quarterly report from inspector general Neil Barofsky said.

He said there continued to be conflicts of interest around credit rating agencies that failed to warn of risks leading up to the financial crisis. The report added that the recent rebound in big bank stocks risked removing urgency of dealing with the financial system’s problems.

“Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,” the report said. “The firms that were ‘too big to fail’ last October are in many cases bigger still, many as a result of government-supported and -sponsored mergers and acquisitions.”

ANGER, CYNICISM, DISTRUST

The report cites an erosion of government credibility associated with a lack of transparency, particularly in the early handling of the program’s initial investments in large financial institutions.

“Notwithstanding the TARP’s role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism and distrust. These views are fueled by the lack of transparency in the program,” the report said.

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U.S. 30-year mortgage rate retests record lows

October 1, 2009

Thu Oct 1, 2009 10:35am EDT

NEW YORK, Oct 1 (Reuters) – The average rate on 30-year U.S. home loans fell in the past week to retest record lows, helping stimulate housing demand, Freddie Mac (FRE) said on Thursday.

The most widely used long-term borrowing cost dropped 0.10 of a percentage point in the week ended Oct. 1 to 4.94 percent, the lowest since late May, and near the all-time low of 4.78 percent set in April.

A year ago, before government interventions aimed at cutting borrowing costs to stimulate housing and the economy, the rate was 6.10 percent.

Freddie Mac started tracking 30-year mortgage rates weekly in 1971.

The 15-year average mortgage rate, which it started tracking in 1991, set a record low of 4.36 percent in the latest week. A year earlier, this rate was 5.78 percent.

“Low mortgage rates are helping to stabilize home sales,” Frank Nothaft, chief economist at Freddie Mac, said in a statement.

New home sales in August rose to the highest annualized pace since September 2007, while unsold inventory fell to the lowest sine February 1983, he noted.

Sales of existing homes declined in August but were at the second-highest pace in almost two years. And home prices, based on the S&P/Case-Shiller indexes, have risen for three straight months through July after plummeting for three years.

Pending home sales gained 6.4 percent in August in the seventh straight monthly increase, reaching the highest level since March 2007.

The U.S. housing remains depressed despite the recent signs of life and there is growing concern about how the market will hold up if the federal $8,000 first-time home buyer tax credit is not extended past November 30.

Home prices on average remain more than 32 percent below 2006 peaks, and many economists expect further erosion under the weight of rising foreclosures.

Lenders charged an average 0.7 point in fees for 30-year loans, up from 0.6 point the prior week.

(Reporting by Lynn Adler)


Investors trading 3 stocks that may be doomed

August 27, 2009

Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero

Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT

WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.

“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

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FOMC Statement – “economic activity is leveling out”

August 12, 2009

Release Date: August 12, 2009

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, 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 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 is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: 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.

2009 Monetary Policy Releases


How Do I Know You’re Not Bernie Madoff?

June 15, 2009

by Paul Sullivan
The New York Times
Monday, June 15, 2009

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

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