Thursday, May 28, 2009

A Look Inside Fed’s Balance Sheet

  • A Look Inside Fed’s Balance Sheet — 5/28/09 Update
    Posted by Phil Izzo

    The Fed’s balance sheet shrunk in the latest week to $2.064 trillion from $2.165 trillion. While the central bank boosted its holdings of Treasurys and federal agency debt, the increases were more than offset by declines in direct bank lending and liquidity swaps with foreign central banks. The TALF and commercial paper facilities also shrunk in the latest week.

    In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

    In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

    Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

    Click Continue Reading to see an interactive chart.

    G20: Why Pittsburgh?

    Posted by Bob Davis

    The decision to convene the leaders of the Group of 20 countries in the U.S. this fall around the time that heads of government gather at the United Nations in New York presented U.S. officials with a delicate decision: How to gather the 20 leaders in a way that didn’t insult those from countries that aren’t included.

    The solution was to put some geographic distance between the U.N. and the site of the G20 meeting, but not so much distance that the site was inconvenient. One option considered was a site in northern suburbs of New York City.

    The White House said Thursday that the G20 leaders will convene in Pittsburgh on September 24 and 25. By choosing the western Pennsylvania city (unemployment rate 7.6%, at last tally) the U.S. is turning to an approach often followed by the Group of Eight, the organization of big industrialized countries.

    Over the years, G8 summits often have been used as an economic development tool, a way to bring businesses to cities outside the host nation’s capital. Italy, for instance, shifted the location of this summers G8 summit from the island of La Maddalena off the northeast coast of Sardinia to l’Aquila in the Abruzzo region, a town devastated by an earthquake in April.

    Fed May Have to Tweak Treasury Purchase Program

    Posted by Deborah Lynn Blumberg

    With long-end Treasury yields racing higher this week and wreaking havoc on the mortgage bond market, the Federal Reserve might have to tweak its Treasury purchase program sooner rather than later.

    To date, the Fed has purchased a little less than half of the $300 billion it has pledged to buy in Treasurys by the fall, yet long-end Treasury yields have continued to trek stubbornly higher since March and are now beginning to pull mortgage rates up with them.

    To keep rates from moving even higher from here, now is the prime time for the Fed to fine-tune its programs. That may not necessarily mean increasing the amount it buys — which might have the unwanted effect of undermining the dollar. Rather, the Fed should be more targeted in the maturities it buys, Treasury market participants urge.

    Treasurys maturing in five to 10 years should be the focus of the Fed’s buying, said Ward McCarthy, managing director at Stone & McCarthy. McCarthy sees no need to increase the overall amounts, but urges the Fed to dedicate “as much heavy artillery as possible” to those maturities.

    Higher Treasury yields come amid tentative signs of economic improvement. Traders and investors are also demanding higher returns in response to the huge amount of new Treasurys on offer this year at a time when there are fewer primary dealers to buy the debt. Goldman Sachs estimates the government could sell some $3.5 trillion in Treasurys this fiscal year ending September, dwarfing the amount of Fed buying.

    This week, yields rocketed decisively higher, breaking through key psychological levels. Adding to the sell-off were worries about the U.S. ratings outlook, even though the three major ratings firms all noted that the U.S. triple-A rating isn’t under any threat for now. Higher Treasury yields upended the mortgage bond market — the 10-year Treasury yield is the benchmark for fixed-rate mortgages — further exacerbating the sell-off in government debt.

    The 10-year yield touched 3.76%, a level nearly 100 basis points up from where it was when the Fed began its buying. The rate rise is worrisome as it threatens to undo the Fed’s success in forcing mortgage rates lower with its purchases of agency and mortgage debt. Thursday, the average 30-year fixed rate was quoted above the key 5% mark at 5.08%, according to bankrate.com, from just 4.78% last week. The Fed has bought nearly $500 billion in mortgage bonds alone, out of the over $1 trillion earmarked for mortgage-related debt.

    The Fed in the next two weeks is scheduled to buy Treasurys four times, less than it has in the last two weeks of May. It will buy seven- to 10-year notes this coming Wednesday and two- to three-year securities Thursday. The following week it will buy Treasurys maturing in four to seven years and then ones maturing in 10 to 17 years.

    Don Galante, senior vice president of fixed income at MF Global, urged the Fed to zero in on an even narrower band — seven- to 10-year notes. Reducing its purchases of two-year notes and buying seven- to 10-years would not only help mortgage rates, Galante said, but it would also make more sense from a financial standpoint, given the recent decline in prices in long-dated Treasurys.

    The Fed “should take advantage of the steepness of the yield curve,” Galante said, referring to the gap between short- and long-dated yields. Whether or not the Fed needs to dedicate more than the $300 billion already pledged is a matter for another day, he added. Now, policy makers “just need to change the weighting of what they’re doing.”

    Given the week’s widening in risk premiums on mortgage debt to Treasurys, the Fed should act quickly, he said.

    Yet there are arguments to be made for the Fed to make a big splash to regain control over the path of long-dated yields.

    The Fed should remove any limits to the amount of Treasurys it will buy, Lou Brien, market strategist at DRW Holdings in Chicago, said, and instead note that it will buy as much as needed to help the economy heal. “A $300 billion cap starts the clock ticking,” he said.

    Brien said it might not be the Treasury or the mortgage markets that force the Fed’s hand. Should stocks take fright over rising Treasury yields and drop sharply, the Fed could be goaded into action.

    Policy makers themselves have discussed changes to the Treasury purchase program, the minutes of the April FOMC meeting showed. Some thought an increase in the total amount might be warranted, but others recommended waiting to see how the economy and financial conditions respond.

    Given the jittery state of financial markets, the Fed may not have the luxury of waiting until its next meeting on June 23-24.

    Fed’s Trouble With Bubbles

    Posted by Michael S. Derby

    Back in 2002, when Ben Bernanke was just a Fed governor, he made a joke that has had special resonance in the current crisis.

    Speaking to a conference honoring the legacy of economist Milton Friedman, Bernanke said of the relationship between the Great Depression and the Fed: “We did it. We’re very sorry” and “we won’t do it again.”

    The future central bank chief was referring to a collection of monetary policy mistakes and other Fed-related issues, which he and others believed greatly exacerbated the economic tribulations of those years.

    While Bernanke could not have known it at the time, the speech had significant implications. His criticism of the tight money policies pursued then by the Fed explains the extremely stimulative response aimed at the current crisis.

    When he said the Fed wouldn’t repeat past errors, Bernanke meant it. But what about new errors?

    While it remains a controversial notion, a notable camp of economists believe the Fed’s approach to asset price bubbles has played a huge role in the economy’s current woes. There are signs officials are embracing some of that thinking and are mulling ways they can avoid making the same missteps in the future.

    Central bankers have long been reluctant to tighten interest rates to prick asset price bubbles. They doubt their ability to spot bubbles, and fear that their relatively blunt policy tools, once pointed at a given asset class, will likely cause too much collateral damage in the broader economy.

    That philosophy has proved costly. In the current episode critics contend cheap money offered by the Fed in the early years of the decade, coupled with lax regulation, set off a housing market boom totally out of line with economic fundamentals.

    When that bubble exploded, it sowed the seeds for the worst downturn since the Depression. Rate policy and other Fed tools, some argue, could have done something to arrest runaway house prices. But it wasn’t even tried, thus leaving the Fed again in a starring role in events surrounded by considerable economic pain.

    Whether they buy the criticism, Fed officials’ views are nevertheless evolving. As they realize tight money in a time of economic contraction is bad, officials are now trying to find ways to use their toolkit to prevent future bubbles that will cause broader economic harm.

    In a speech last fall, Bernanke recognized the problem, and what may need to be done. “There’s no doubt that as we emerge from the current crisis that we’re all going to look very hard at that issue, and what can be done about it,” he said in October.

    In April San Francisco Fed president Janet Yellen said the trouble bubbles can cause “lends more weight to arguments in favor of attempting to mitigate bubbles.” The official argued in favor of a tailored approach to specific events, saying regulation and supervision might be the right path in certain circumstances, and rate policy the better avenue at other times.

    Soon to retire Gary Stern, the veteran leader of the Minneapolis Fed, has also seen his thinking evolve. Speaking earlier this month he agreed bubbles should be more forcefully addressed by policy makers. Stern flagged tradeoffs between growth and the blunting of a bubble, and highlighted the importance of Fed communication to navigate this environment.

    “The central bank must have public support for the actions it pursues, and it is easy to imagine resistance to concerns about asset price levels,” Stern said. But it can be done, he said, pointing to Paul Volcker’s successful battle against inflation at the start of the 1980s, even though it came at great economic cost.

    Economists React: New Home Sales Indicate Stability, Not Recovery

    Posted by Phil Izzo

    Economists and others weigh in on the modest increase in new-home sales.

    • The new home sales numbers seem to confirm what the single-family housing starts and permits numbers imply — that the market for new single-family homes is flattening — indeed, that it may have hit bottom in January — and that the recovery will be a slow one. Despite improving numbers, we are not ready to say that the market has hit bottom. These numbers are estimates with large standard deviations. Because the margin of errors is big, the footnote in the press release warns, “It takes four months to establish a trend for new homes sold.” We still project that this market will start expanding in the second half of this year. –Patrick Newport, IHS Global Insight
    • As opposed to the resale volumes, which increased by 2.9% month-to-month in April, new home sales remain sluggish. Plunging prices, record-low mortgage rates and an $8000 tax credit for first time buyers did not help much to push up hew housing demand. We believe, new home sales is probably a better reflection of the underlying demand than the existing home sales which have been highly boosted by the increasing foreclosure numbers recently. Nevertheless, new home inventories kept declining in April which sent the months’ supply in new homes to 2.3 month below a record of 12.4 months reached in January. In addition, the home prices kept falling and were 14.9% below last April’s levels. Even though we see builders are becoming more optimistic about the future of the housing industry and there is some stabilization in housing demand, surging foreclosures, rising mortgage rates and high unemployment rates will weigh heavily on new home sales and will prevent a sharp rebound in the housing market in the near future. –Yelena Shulyatyeva, BNP Paribas
    • New homes are now sitting on the market for a median 10.9 months before selling, and completed homes still comprise an extraordinarily high share of total homes for sale. While sales have stabilized within a fairly narrow range over recent months, there is little to suggest that the sales rate will post a meaningful and sustained increase any time soon. Despite the Fed’s efforts, mortgage rates are heading higher, while the ongoing erosion in the labor market and tougher mortgage lending standards will continue to act as drags on sales. It is true that the first-time buyer tax credit is stimulating sales, but this will not be sufficient to sustain a meaningful increase in new home sales. –Richard F. Moody, Forward Capital
    • Even with some normalization of unsold inventory of newly constructed homes, it’s unlikely that the real estate market can support any significant pick-up in homebuilding activity in the foreseeable future. That’s because foreclosure activity is still increasing and these properties are flooding the market. –David Greenlaw, Morgan Stanley
    • The report was a bit of a mixed bag, as the weaker than expected gains in new home sales will likely be offset by the improvement in the inventory data. –Millan L. B. Mulraine, TD Securities
    • This is a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months. The relatively late Easter might have restrained activity, we suppose, but we cannot be sure. Either way, we still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months. –Ian Shepherdson, High Frequency Economics
    • Looking ahead, reports from homebuilders indicate that activity picked up in April and then a bit further in May, led by first-time homebuyers attracted by steep price declines at the bottom end of the market. The same appears to be true of existing homes, where first-timers are being tempted by deeply discounted properties coming out of foreclosure. Therefore, while sales rates may well have bottomed, it seems clear that gains in activity will remain concentrated in lower priced homes. However, supply will remain enormous, particularly with increased competition coming from distressed sales of existing homes. This suggests that prices will continue to edge lower at the bottom end of the market even as demand for these homes picks up a bit –Joshua Shapiro, MFR Inc.
    • Although new single-family sales were a little below expectations in April, we judge the data to be consistent with a bottoming out in new housing construction activity as also suggested by single-family housing starts and permits and the NAHB’s housing market index. Perhaps the most constructive indicator is the decline in the number of homes for sale in April, both in absolute terms and in relation to sales (though the months’ supply remains elevated). The latest mortgage delinquency data for the first quarter remind us that there are still very significant problems in the housing market. –RDQ Economics

    Secondary Sources: Clinton, Compensation, China

    Posted by Phil Izzo

    A roundup of economic news from around the Web.

    • Clinton’s Economic Legacy: On the New York Times’s Economix blog, David Leonhardt posts a transcript of Bill Clinton’s comments on his economic legacy. “Mr. CLINTON: Yes. Well, I don’t know if I would have done anything different. First, I always ask. I do not believe this would have happened in this way if I had been in office or if Al Gore had been elected. I just don’t. I think we would have caught the housing bubble and taken steps to stem it before it got out of hand. And I know that having Arthur Levitt at the Securities and Exchange Commission would have made a huge difference.”
    • Crazy Compensation: Writing for the Journal, Alan Blinder says that incentive packages bear a large portion of the blame for the crisis. “What to do? It is tempting to conclude that the U.S. (and other) governments should regulate compensation practices to eliminate, or at least greatly reduce, go-for-broke incentives. But the prospects for success in this domain are slim. (I was in the Clinton administration in 1993 when we tried — and failed miserably.) The executives, lawyers and accountants who design compensation systems are imaginative, skilled and definitely not disinterested. Congress and government bureaucrats won’t beat them at this game. Rather, fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, I’ll remind you (and please remind the board members), are supposed to represent the interests of stockholders, not those of managers. Quite plainly, many were asleep at the switch, with disastrous consequences. The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. As one concrete manifestation, boards should abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better. For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.”
    • China’s One-Child Policy: At the Stash, Zubin Jelveh looks at a new paper that examines the effects of China’s one-child policy on savings and what that means for the crisis. “But why did the Chinese choose to save rather than spend their earnings in the first place? A big part of that answer, argue Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI in a new working paper, is China’s one-child policy, which sent the country’s sex ratio from 107 boys per 100 girls in 1980 to the current imbalance of 120 boys per 100 girls. That means that by 2005, there were about 40 million men who could not “mathematically get married due to a shortage of women,” write the researchers. The reason a shortage of women would cause an increase in savings is not clear. In order to compete for wives, a shortage could cause men and families with sons to save more in order to signal their wealth to potential brides. On the other hand, these groups might also spend more money on status goods like expensive clothes and cars to achieve the same end. However, the researchers find that across different provinces across China between 1978-2006, “local savings rates are systematically and positively correlated with local sex ratios.”"
  • May 28, 2009
    5:00 AM

    South Korea: Ready to Lead the G20?

    Posted by Bob Davis

    British Prime Minister Gordon Brown put considerable time and political skill into making the Group-of-20 leaders meeting in London a success last month. Though there was considerable bickering, the industrialized and big developing nations generally agreed to boost stimulus spending, crack down on tax havens and regulate hedge funds.

    Next year, South Korea chairs the G20, to the groans (privately expressed) of some U.S. and European officials. Why the worry? In international negotiations on trade and finance, Asian nations are notorious for laying back and only reluctantly making concessions at the end of talks. The U.S. and Europe invariably push the deals forward.

    South Korea will depart from the Asian pattern, vows Il SaKong, a prominent South Korean economist who is the country’s point man on the G20 summit. “The G20 members, especially the G7, know we’ll be more than willing to lead,” he said. “Leadership doesn’t mean working alone. Leadership means getting harmony, getting cooperation and getting support.” The G7 are the U.S., Canada, Britain, France, Italy, Germany and Japan.

    But leadership also means bull-dogging ahead. “Koreans are never shy; we have a short temperament,” he said.

    One of the biggest challenges facing G20 countries is figuring out how to make sense of so many leaders summits. The G8 — Russia plus the G7 — meets in Italy in July. The G20 — the G8 plus big emerging markets — meets in September in New York. Then the G20 is likely to gather again in the spring of 2010 in South Korea, Mr. SaKong figures.

    What can the different sessions focus on? The state of the economic crisis is bound to set the agenda. The G8, for instance, may include an effort to revive the perpetually stalled Doha trade talks, Mr. SaKong said, as well as push ahead on climate change issues. He said he considers the G8 “an informal steering committee” for the larger group. (A number of big developing countries are attending the Italy summit anyway for side sessions on trade, climate and other matters.)

    By September, if the global economy improves, the G20 may start to look at the “subject of what do you after the crisis? A post-crisis strategy,” Mr. SaKong said. He was in Washington D.C. on Wednesday to talk to White House economic adviser Lawrence Summers and others on the G20 agenda.

    And by the following spring? “If you use the word recovery as touching the bottom, by the first of next year the world economy will be close to that situation,” he said. At that point, the post-crisis strategy may start to be implemented.

    But Mr. SaKong was wary about using use the term “exit strategy,” for fear it would send a premature signal that the crisis is over. “We have to be careful about that term until we are assured the recovery is firmly based,” he said. “If we talk about an exit strategy, that could be interpreted as eliminating stimulus and tightening monetary policy.”

  • May 27, 2009
    6:16 PM

    Keeping Up With TALF

    Posted by Kellie Geressy

    With the deadline for the fourth round of Term Asset-Backed Securities Loan Facility (TALF) funding drawing close, seven deals were launched Wednesday in the asset-backed security market, all of them eligible for cheap funding from the Federal Reserve.

    Deals totaling more than $5.779 billion including those backed by auto leases from Japanese auto maker Nissan Motor Co., German car maker BMW AG, and American auto manufacturer Ford Motor Co. came to market. Nissan is offering a $1 billion deal, BMW $1.5 billion in such debt and Ford $1 billion.

  • May 27, 2009
    5:48 PM

    Rural America Has Broadband — or Not — Says FCC

    Posted by Amy Schatz

    With $7.2 billion in stimulus money at stake, much has been made of how little broadband Internet service is available in rural America. But a new report from the government agency in charge of devising a national Internet strategy says it doesn’t really know how much of rural America is actually wired.

    “We would like to answer this question definitively,” the Federal Communications Commission said in a report released Wednesday. “Regrettably we cannot. The (FCC) and other federal agencies simply have not collected the comprehensive and reliable data needed to answer this question.”

    Good thing Congress set aside $350 million for states to draw up local broadband maps, perhaps, since federal officials will have scant information to go on when handing out that $7 billion and change over the next two years.

    The FCC is advising Obama administration officials on how to hand out broadband stimulus funds and its also embarked on a broader effort to come up with a national broadband strategy. The agency’s report on rural broadband access is the first step towards that.

    (It’s worth noting that the report reflects the thoughts of interim Democratic FCC chairman Michael Copps, not the full FCC.)

    Congress asked the FCC to take a look at the state of broadband in rural America when it passed the $290 billion Farm Bill last year. Other than finding that the agency basically has no idea where broadband is available in rural America, the FCC basically said that federal agencies need to work together better and that the government may need to step in and take a greater role in ensuring rural America has Internet access.

    “A complementary government role in broadband deployment can yield advantages that a free market solution cannot achieve alone,” the report says. “For example, government involvement in rural broadband may increase the efficiency and reliability of local services, such as law enforcement and emergency services, promote job growth and economic development by attracting and retaining businesses and increasing use of technology in a community.”

    The Agriculture Department has been in charge of helping wire rural America for some time but its program has come under some criticism for being too slow, bureaucratic and less than effective in handing out money.

    The FCC didn’t dwell on those criticisms in its report although it did note the “(Agriculture Department) programs face several challenges.”

    In March, the Agriculture Department’s inspector general was a bit more pointed when he released a report that said the USDA’s continued practice of awarding funding to areas where broadband service is already available doesn’t really help people in rural, un-served areas. – Amy Schatz

  • May 27, 2009
    4:06 PM

    Another Gloomy Forecast: This One From the U.N.

    Posted by David Wessel

    The United Nations downgraded its economic forecast for 2009, and said it anticipates the world economy will to shrink by 2.6% 2009, much worse than the “pessimistic scenario” of its January forecast which predicted a decline of 0.5%. By the UN Tally, the world economy expanded by 2.1% 2008 and nearly 4 per cent per year during 2004-2007.

    “Should current policy measures take traction, a mild recovery may be expected in 2010,” says a UN mid-year report, World Economic Situation and Prospects 2009 (WESP). But it cautioned that a more prolonged global recession is also possible if the vicious cycle between financial destabilization and retrenchment in the real economy cannot be sufficiently contained and concerted global policy actions are not taken. “If financial markets do not unclog soon and if the fiscal stimuli do not gain sufficient traction, the recession would prolong in most countries with the global economy stagnating at lower welfare levels well into 2010,” says the report.

    WESP includes a more optimistic, but increasingly less likely, scenario where the world economic recovery would begin in the second half of 2009 and the WGP would expand by 2.3% in 2010. This scenario requires problems in financial markets to be resolved in the first half of 2009. Approaching the end of May 2009, the economic landscape remains very winterly with no visible green shoots to be seen which could signal beginnings of a new spring, the UN said.

Posted by Ricardo Valenzuela at 7:49 PM

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)