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Fed bond-buying decision keeps mortgage rates at record lows

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Housingwire

The Federal Reserve‘s plan to reinvest principal payments on some bonds into mortgage-backed securities is already contributing to the nation’s record low mortgage interest rates, Bankrate said Thursday.

Bankrate said the Federal Open Market Committee seems to be taking direct aim at mortgage rates by shifting $400 billion from short-term holdings into long-term government bonds. The program, which begins Oct. 3 and runs through June, will involve longer-term Treasury securities with remaining maturities of six years to 30 years, and will be financed through the sale of shorter-term Treasurys with maturities of three years or less.

"This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative," the FOMC said in a statement following its two-day meeting.

Analysts also said anemic economic growth and European debt fears are keeping investors on the sidelines.

Rates are unlikely to increase until mortgage refinancing and purchasing activity picks up, Bankrate said.

"In order to get the most economic impact out of low mortgage rates, the pool of prospective refinancers needs to be expanded. Deeply upside-down homeowners, those with second liens or mortgage insurance, and lender concerns about buyback liability are all formidable impediments to refinancing," according to the firm, which aggregates rate data from across the country.

The Freddie Mac primary mortgage market survey showed the average rate for a 30-year, fixed-rate mortgage remained unchanged this week at 4.09%, while the 15-year, fixed rate dropped one basis point to a new record low of 3.29%.

Meanwhile, the five-year, Treasury-indexed hybrid adjustable-rate mortgage averaged 3.02%, up from 2.99% last week and down from 3.54% a year ago.

The one-year, Treasury-indexed ARM averaged 2.82% this week, up from 2.81% a week earlier and down from 3.46% last year.

"A sluggish economy and investor concerns over the European debt markets left mortgage rates largely unchanged this week," said Frank Nothaft, vice president and chief economist for Freddie Mac.

"Manufacturing activity in both the New York and Philadelphia regions contracted in September," he said. "Moreover, the Federal Reserve board reported that households lost nearly $150 billion in net worth in the second quarter, representing the first quarterly decline in a year."

Bankrate data show the 30-year FRM at record lows for the fifth consecutive week. The average rate for a traditional mortgage fell to 4.29%, from 4.32% last week, while the 15-year FRM declined to 3.42% from 3.44%.

In addition, the 5/1 ARM decreased to 3.05% from 3.07% last week.

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September 26, 2011 at 4:28 pm

Posted in Federal Reserve

G.O.P. Urges No Further Fed Stimulus

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The New York Times

Even though the financial markets have been counting on the Federal Reserve to take action, Republican Congressional leadership sent a letter to the Federal Reserve chairman on Tuesday evening urging it not to engage in further stimulus.

The letter was sent in the midst of a two-day meeting in which Fed officials are widely expected to undertake policies to lower long-term interest rates. That move would be intended to loosen up credit in hopes of promoting growth. The meeting ends Wednesday, and the Fed is expected to release a statement Wednesday at 2:15 p.m.

“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” said the letter, signed by four of the top Republicans in Congress: Mitch McConnell of Kentucky, the Senate Republican leader; Jon Kyl of Arizona, the Senate Republican whip; House Speaker John Boehner of Ohio and House Majority Leader Eric Cantor of Virginia.

The Fed’s chairman, Ben S. Bernanke, has not said further stimulus was in the works, but economists and analysts have repeatedly asserted that they believe the central bank will announce more easing.

“I just don’t think the Fed will sit idly as momentum fizzles in this recovery,” said Dana Saporta, a United States economist at Credit Suisse.

Minutes from the Fed’s latest meeting revealed sharp dissent within the group of policy makers, so further stimulus is not necessarily a sure bet.

As the Republican letter notes, economists are divided on how much the move would help the stalled recovery. The Fed, after all, has tried several rounds of monetary stimulus in the last four years.

Republican Congressional leaders expressed not only skepticism that further easing would improve the recovery, but also concerns that such actions might be damaging.

“Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers,” the letter from Republicans said.

Many economists, however, are unconvinced by these risks and argue that a weakened dollar would be good for the country because it would make American exports more attractive.

With unemployment at 9.1 percent and Congress unable to agree on fiscal policies that might encourage job creation, many advisers have been calling on the Fed to continue using whatever ammunition it has left.

The Federal Reserve is an independent body whose decisions do not have to be ratified by the president or Congress, and efforts to influence monetary policy are discouraged to maintain its credibility.

“Even if I agreed” with the Republican letter, Tony Fratto, a former adviser to President George W. Bush, wrote in a Twitter post, “I’d still disagree with the effort to put public political pressure on Bernanke.”

Over the years, there have been many efforts by members of both parties, from both the White House and Congress, to influence Fed policies, according to Allan H. Meltzer, a political economy historian at Carnegie Mellon.

Less than a year ago Michele Bachmann, a Minnesota congresswoman who is running as a Republican presidential candidate, sent a letter to Mr. Bernanke urging him to refrain from the last round of stimulus, which the Fed ultimately decided to do.

In recent months other Republican presidential candidates have stepped up their attacks on Fed policy, with Rick Perry, the governor of Texas, calling further easing “treasonous.”

Fed critics have said they are merely trying to counter pressure from Democrats for the Fed to do more.

“This is the most politicized Fed we’ve ever had,” Mr. Meltzer said. “They’ve been doing the Treasury’s work for quite some time, buying things like Treasuries and bonds. It’s no surprise that there’s political pressure coming from the other direction.”

The Federal Reserve was meant to be independent so that it would be shielded from short-term political interests, and Fed officials have repeatedly said they are unmoved by external political pressures. A Fed spokeswoman acknowledged receiving the letter on Tuesday evening but she declined to comment further.

Appearing to cave to political interests — on the left or the right — could compromise the Fed’s authority and jolt markets even more than a popular or unpopular policy decision.

If anything, Federal Reserve members seem to be trying show their ability to exert their own influence. Traditionally, Fed officials have refrained from commenting on fiscal policy except in the vaguest of terms, but in an August speech Mr. Bernanke called on Congress to avoid steep spending cuts in the near future. He also gave specific recommendations for fiscal measures to promote long-term growth.

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September 26, 2011 at 2:10 pm

Posted in Federal Reserve

Fed Runs Risk of Doing Less Than Investors Expect

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The New York Times

Investors have concluded that the Federal Reserve will announce new measures to promote economic growth after a meeting of its policy-making committee ends Wednesday. Long-term interest rates have moved as if the Fed had already spoken.

The central bank is often described as facing the choice of whether to do more to improve the economy. But the anticipatory behavior of investors means the Fed really faces a slightly different choice, one it has confronted often in recent years: whether to risk doing less than expected.

The overriding argument for action is the persistent weakness of the American economy, which has left more than 25 million Americans unable to find full-time work.

The Federal Reserve chairman, Ben S. Bernanke, who has made a series of unusual efforts to revive growth, has not discouraged speculation that he is ready to try again.

“I think the Fed has no choice but to act,” said Krishna Memani, director of fixed income at Oppenheimer Funds. “If the Fed were not to do anything having built market expectations to a pretty decent level, I think the markets would react quite negatively to that.”

But the Fed also faces mounting pressure against additional action, including strident criticism from Republican presidential candidates and divisions in the policy-making committee. Moreover, the options available to the central bank have less power to generate growth, a greater chance of negative consequences, or both, than those it has already tried.

Some close watchers of the central bank say investors’ behavior could let the Fed offer a token gesture now, postponing any larger move at least until its next meeting in November. After all, the Fed is reaping the benefits of action without the costs.

“There is no reason for the Fed to rush,” Lou Crandall, chief economist at Wrightson/ICAP, wrote in a recent note to clients predicting such an outcome. “It is in the Fed’s interest to milk the anticipation effect as long as possible.”

The move markets are anticipating is a new effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Yields on the benchmark 10-year Treasury note fell to a record low of 1.88 percent at the start of last week, reflecting the Fed’s earlier efforts to lower rates and investors’ pessimism about the economy.

The hope is that an additional reduction in rates will provide a little more encouragement for companies to build factories and hire workers and for consumers to buy cars and dishwashers.

The Fed has held short-term rates near zero since December 2008, by increasing the supply of money.

To further reduce long-term rates, the Fed bought more than $2 trillion in government debt and mortgage-backed securities, reducing the supply available to investors and thereby forcing them to pay higher prices — that is, to accept lower interest rates.

The Fed could seek to amplify that effect by adjusting the composition of its portfolio, selling short-term securities and using the proceeds to buy long-term securities, which it predicts would further reduce rates.

An analysis by the forecasting firm Macroeconomic Advisers estimated that such an effort by the Fed could raise gross domestic product by 0.4 of a percentage point over the next two years, and create about 350,000 jobs. That is comparable to estimates of the impact of the central bank’s most recent aid campaign, the QE2, or quantitative easing, purchases of $600 billion in Treasury securities, which concluded in June.

Mr. Bernanke announced in August that the Federal Open Market Committee, the policy-making board, would meet for two days, extending its scheduled one-day meeting this week to include both Tuesday and Wednesday, to consider that and other options.

The Fed could take smaller steps, like promising to maintain current efforts longer. It may also consider options that could deliver a more powerful jolt to the economy, like increasing the size of its investment portfolio again. But more aggressive measures have little internal support.

The Fed, Mr. Bernanke said, is “prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.”

He still commands a solid majority of his 10-member board despite the emergence of the largest bloc of internal dissent in two decades. Three members voted against the decision last month to declare an intention to hold short-term interest rates near zero for at least two more years, replacing a stated intention to maintain the policy for an “extended period.”

The central bank has also become a target of conservative politicians, with several Republican presidential candidates denouncing its efforts to increase growth. But even Mr. Bernanke’s internal critics dismiss these attacks.

“I don’t spend a lot of time worrying about what any one candidate says about us,” Richard W. Fisher, president of the Federal Reserve Bank of Dallas, told Fox Business Network in a recent interview. “The issue is to get it right.”

Of greater concern is the possibility that the Fed is nearing the limits of its powers. Interest rates are already depressed and, like a board mounted on a spring, pushing down gets harder as the floor gets closer.

Studies also have found the Fed’s success in reducing rates has not yielded the full measure of predicted benefits. Mortgages and small business loans may be cheap, but because lenders remain cautious, they are not easy to get.

The research firm Capital Economics said recently any renewed effort by the central bank would be unlikely to overcome those obstacles.

“We don’t expect it to have any dramatic impact on the wider economy because many households will still not qualify for loans at those lower rates,” it said.

The Fed also would face an increased risk of losing money on its investments.

And only so many Treasuries are available for sale. If the Fed sold all of its securities maturing in the next four years and bought only securities maturing in more than 17 years, maximizing its impact, it would end up with 70 percent of the available long-term inventory. That could interfere with the normal operations of insurance companies and other traditional buyers.

Laurence H. Meyer, a former Federal Reserve governor who now leads Macroeconomic Advisers, said he expected the Fed to conclude that the potential benefits outweighed these issues, but that it needed more time to hammer out details.

“We expect them to come out of the committee meeting feeling that they’ve decided and have a consensus to move in November,” he said.

Mr. Meyer suggested that the Fed could mollify the markets by announcing what amounts to a preview, by investing the proceeds of maturing securities — about $20 billion each month — in longer-term debt.

Such a move might not do much to move the economic needle, because the amounts involved would be minute by the standards of monetary policy, but it could be enough to preserve the valuable conviction that the Fed will do more soon.

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Written by appraisalmanagementnews

September 26, 2011 at 1:45 pm

Posted in Federal Reserve

Bank regulators to unveil "living will" plan

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Reuters

U.S. regulators are set to vote next week on a final rule governing the plans large banks must draft on how they can be liquidated if they are heading toward failure.

The 2010 Dodd-Frank financial oversight law requires these "living wills," which are part of the government’s new power to seize and break up large, failing firms.

The Federal Deposit Insurance Corp announced plans on Thursday for its board to vote on the final rule on Tuesday. It is drafting the rule with the Federal Reserve.

Regulators have to approve the plans once banks submit them. They can force changes to the structure of banks or other large financial companies if they believe the institution could not easily be liquidated once in trouble.

Former FDIC Chairman Sheila Bair, who left her post in July, had stressed the need for regulators to force banks to simplify their operations, such as by creating more subsidiaries, if the plans could not be easily executed.

The rule applies to banks with more than $50 billion in assets and to other large financial companies whose sudden failure could roil financial markets.

Proponents of this new power to seize and liquidate firms argue it will curb taxpayer bailouts and limit the sort of market turmoil caused by the 2008 bankruptcy of Lehman Brothers.

But analysts and market participants have expressed skepticism, saying the government would not let a large bank fail out of fear it would wreak havoc on the economy.

The banking industry raised some concerns about the earlier proposed version of the living will rule, which was released in April.

Banks such as Wells Fargo have said regulators need to do more to ensure that the plans remain confidential and not subject to disclosure through lawsuits or Freedom of Information Act requests.

Banking groups have also asked regulators to start off with a pilot program rather than subject all eligible institutions to the requirement right away.

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September 13, 2011 at 2:10 pm

US Economy Is Basically ‘Still In Recession’: Fed’s Evans

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CNBC

The U.S. economic outlook has "clearly" deteriorated this year, and the continued softness of economic indicators shows that the headwinds facing the country are even stronger than thought, Chicago Federal Reserve President Charles Evans said on Wednesday.

"Conditions still aren’t much different from an economy still in recession  ," Evans, speaking at a seminar in London said.

He said the Fed  faced significant challenges in overcoming the obstacles left behind by the financial crisis.

Evans, a voting member on the Federal Open Market Committee  , said he believed central banks should focus on medium- rather than short-term inflation as many short-term effects such as fluctuations in food and energy prices were beyond policy makers’ reach.

Given how "truly badly" the U.S. was doing on the jobs front, the Fed should consider more aggressive action, he said.

He did not explicitly call for more quantitative easing  or bond purchases but called for "strong action."

"I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation," he said. "Such further policy accommodation does increase the risk that inflation could rise temporarily about our long-term goal of 2 percent," he said.

The Fed Open Market Committee said in August that it would continue to keep its benchmark interest rate low for at least through mid 2013, acknowledging that the recovery it had hoped for had so far failed to take shape.

The Fed ended a $600 billion Treasury bond-buying program at the end of June.

Temporary inflation above 2 percent is not something we should "regard with horror," he said.

Evans said it was "painfully obvious" that large quantities of unused resources were an enormous loss to the U.S. economy, referring to the 14 million Americans unemployed today.

Some argue there are limits to what further accommodative measures can do, he said, adding: "I’m personally much more optimistic and don’t want to subscribe to that pessimistic view."

"Monetary policy should be used more aggressively to try to increase aggregate demand," Evans said.

He added he fully supported the policies implemented by the Fed, but added that more needed to be done.

"We should not be afraid of such temporarily higher inflation results today…These are not usual times," Evans said.

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September 7, 2011 at 7:47 pm

Posted in Federal Reserve

Bernanke’s big Jackson Hole speech could rattle the markets

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MSNBC

Whether the Federal Reserve likes it or not, its unprecedented monetary polices over the last few years have conditioned the financial markets to expect a helping hand when the going gets tough.

That’s why all eyes will be on Ben Bernanke, the central bank’s chairman, when he speaks Friday at the Fed’s annual symposium in Jackson Hole, Wyoming.

With the stock market mired in a month-long slump and both the U.S. and euro zone economies in danger of sliding into recession, investors are bracing for a possible repeat of last year’s performance, when Bernanke hinted the Fed would act if conditions deteriorated.

Two months later, the central bank began pumping $600 billion into the financial system through direct purchases of Treasury debt, a second round of stimulus that markets dubbed "QE2."

While the jury’s still out on how effective these purchases have been, few are ready to rule out QE3 entirely.

Wyoming may conjure up images of the American Wild West, but markets aren’t expecting Bernanke to ride into the mountain resort with guns blazing — at least not yet.

While the economy has taken a turn for the worse — growth ground to a halt in the second quarter and nearly flat-lined in the first — there’s a sense that the Fed will want to wait a bit longer to assess the impact of its past stimulus.

Other Fed policymakers have sought to downplay expectations of an imminent QE3 announcement. St. Louis Fed President James Bullard was quoted in Japan’s Nikkei newspaper saying that while the Fed could buy more bonds if the economy weakened, the time was not right for such a move.

"Going into Bernanke’s speech at Jackson Hole, people are positioned for a significant shift in policy. (But) we think financial market conditions have to deteriorate even further for more QE3," said Simon Derrick, head of currency research at Bank of New York Mellon.

Nonetheless, traders are still expecting Bernanke to signal in some shape or form that he hasn’t run out of bullets and could start shooting again if need be.

"Based on our conversations with clients, we believe investors would be very surprised if the speech did not include a discussion of asset purchases," strategists at Goldman Sachs wrote in a note to clients.

They said this could involve the Fed reinvesting proceeds from maturing assets into 10- and 30-year Treasuries to hold long-term interest rates low.

"I think we’ll see (QE3) because America needs growth, but I don’t think we’ll necessarily get it on Friday," said Neil Dwane, chief investment officer for Europe at RCM.

Current market moves reflect this. While still down about 15 percent from late July, the S&P 500 rallied smartly Tuesday and the dollar has struggled against major currencies.

More stock market gains could be in store if Bernanke gives a strong hint of future action. After Bernanke’s speech last August, the S&P 500 began a rally that took it up nearly 25 percent by May 2011.

Pulling the trigger now would have the element of surprise going for it and might spark the most aggressive market moves.

There’s been some talk in bond market circles that the 10-year yield’s dip below 2 percent reflected a pricing in of QE3, though those moves probably had more to do with recent dismal jobs, manufacturing and growth data.

Still, there are impediments to launching QE3.

For one thing, Bernanke already caught investors off guard earlier this month and slowed a market rout when the Fed pledged to keep interest rates near zero until at least 2013.

Steven Bell, director of GLC Ltd, a global macro hedge fund in London with $1 billion in assets, also noted that higher inflation may make the Fed cautious. "We have core inflation going up," he said. "It may be low but it’s still going up."

Political opposition is also on the rise. Texas Governor Rick Perry, a candidate for president, even said he would consider it "treasonous" if Bernanke "prints more money between now and the election" in 2012.

That populist anger stems partly from the fact that Fed policies have done little to increase hiring or spark a housing market recovery.

"The history is $600 billion (in bond purchases) hasn’t really made any difference to the U.S. economy," Dwane said. "It’s still where it was when he was talking about it last August: nearly in recession."

If QE3 fails to boost growth or stokes inflation, markets may wish the Fed had done nothing.

"Investors are becoming more cynical," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Central bankers and governments seem to playing the role of the Dutch boy trying to plug holes in the dike."

A humdrum speech that neither announces plans for QE3 or even hints at the Fed’s willingness to act is probably the most unlikely scenario, as far as markets are concerned.

If Bernanke did go that way, it could signal that the hawks were gaining the upper hand. Three Fed policymakers voted against extending the zero interest rate pledge to 2013 and have argued that the Fed cannot do much more to boost growth.

Fred Dickson, market strategist at D.A. Davidson & Co, noted that policy remains very loose even without QE3. In addition to holding rates near zero, the Fed has said it will reinvest the proceeds of maturing assets on its "extraordinarily large" $2.8 trillion balance sheet.

"So they have a stealth QE3 policy in place already," he said.

No mention of future easing would likely hurt stocks but should spark a short-term dollar rally. Treasuries would likely fall as expectations of more Fed support faded.

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Written by appraisalmanagementnews

August 24, 2011 at 8:33 pm

Posted in Federal Reserve

Fed’s Low-Rate Pledge Is ‘Inappropriate’: Plosser

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CNBC

The Federal Reserve’s recent promise to keep rates low for another two years was "inappropriate policy at an inappropriate time," while its statement on the economy was excessively negative, a top Fed policymaker said Wednesday.

Philadelphia Federal Reserve President Charles Plosser said he dissented from the Fed’s statement  because policy should be determined by what the economy is doing rather than by a fixed timeline.

"It was inappropriate policy at an inappropriate time," Plosser told Bloomberg Radio.

"Policy shouldn’t be dependent on the calendar, it should be dependent on the economy," he later added.

The Fed in a statement last week pledged to keep interest rates low for at least two more years and said it would consider further steps to help growth.

Plosser was one of three dissenters from the Fed’s decision, who wanted to avoid any specific time reference on the low-rates pledge.

At the same time, the central bank gave a gloomy picture of the economy, saying that growth was proving considerably weaker than expected, inflation should remain contained for the foreseeable future and U.S. unemployment, currently at 9.1 percent, would come down only gradually.

"I thought the statement that described the state of the economy was excessively negative. Confidence is not strong … a very downbeat description of the economy would not do much to engender confidence in the business community or the consumer community," Plosser said .

The noted policy hawk said that although U.S. economic data had been weak in the first half of the year, reports in the last part of July contained good signals, including a recent decrease in first-time weekly claims for jobless benefits.

In an hour-long interview, Plosser said that while inflation expectations were still contained, the Fed needs to guard against the possibility of a sudden shift upward.

"Personally, I believe we’re going to have to raise rates well before mid-2013," Plosser said. "I don’t know when that date will be, but it’s unlikely to be two years from now, at least from my perspective."

The Fed cut overnight interest rates to near-zero in December 2008 and has bought $2.3 trillion in government and mortgage-related bonds to help the economy.

There is plenty of doubt as to what more the Fed can do to stimulate the economy with rates already so low. Plosser noted it is not the Fed’s role to act if fiscal policy is unable to.

"I think it’s a big mistake for policymakers, either inside the Fed or other places, to believe that if fiscal policy is hamstrung for one reason or another, the Fed has to act," he said. "We run the risk of not being able to deliver on the things people want us to do because we can’t, and then when we try, we fail and our credibility is at risk."

Slower economic growth in 2011 so far has raised speculation the Fed will embark on another round of bond buying to shore up the recovery. Known as quantitative easing  , such a move would likely meet political opposition both domestically and abroad.

Indeed, Texas Governor and presidential candidate Rick Perry said earlier in the week he would consider it "treasonous" if Fed Chairman Ben Bernanke "prints more money between now and the election".

Asked about Perry’s comments, Plosser said it was important for the Fed to maintain its independence and for the public to know about the internal debate that goes on.

"We are asking often times the same question the public is asking. We’re struggling with exactly the same questions and making that known is an important part of being transparent and building confidence in the institution."

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Written by appraisalmanagementnews

August 18, 2011 at 12:52 pm

Posted in Federal Reserve