Tag Archives: Central Banks

U.S. Federal Open Market Committee Minutes from April 2012 Meeting Released

Posted on May 16, 2012 by | Leave a comment

The Federal Reserve Board and the Federal Open Market Committee on Wednesday released the attached minutes of the Committee meeting held on April 24-25, 2012. A summary of economic projections made by Federal Reserve Board members and Reserve Bank presidents for the April 24-25, 2012 meeting is also included as an addendum to these minutes.

Among the more pertinent discussions for investors, several members indicated more easing “could be necessary if economic recovery lost momentum” or downside risks rise.  The difficulty in gauging whether another round of quantitative easing is coming is in just how bad things would need to get.  For investors, the question is how many points on the Dow or S&P 500 would have to be lost before the Fed acts.

There are clear indications that the FOMC is more concerned with the labor market than inflation. The FOMC members agreed that understanding the reasons behind the decline in the labor force participation rate is “important for understanding unemployment dynamics going forwards.” Recent speeches by certain Fed governors have noted that a big key to helping the housing market recover is improvement in the labor market.  Currently, household remain concerned about future job and income prospects, and therefore are loath to take on any major expenses.

Unfortunately, there is not a whole lot of agreement in the FOMC as to what to do about the labor market. A few of the FOMC members argued that the major reason unemployment is high is that aggregate demand is weak. But a few others argued that current measures of slack in the labor market could be overstated if a lot of today’s high unemployment reflects “structural factors,” such as the skills mismatch.

Coming back to more quantitative easing: if the problem is mainly inadequate aggregate demand, the case for doing more to stimulate the economy is stronger than if the problem is primarily structural.

Here is a link to the FOMC minutes: FOMC Minutes – April 24-25, 2012.

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Deleveraging in the Eurozone Making Investing in U.S. Stocks Difficult

Posted on December 19, 2011 by | Leave a comment

The ongoing deleveraging process in the Eurozone has kept a lid on U.S. equities, and in recent days, has caused a significant pullback that threatens to completely derail the annual “Santa Claus” rally.  The matter of investor concern really goes to the lack of proper management of the process than the deleveraging itself.  The disorganized and, at times, contentious mishandling of sovereign debt problems in outlying countries like Greece, Ireland and Portgual, now threatens the debt ratings of the core of the European Union, France and Germany.  The United Kingdom has also stated its preference to remain outside of the euro.

The news seems to get worse every day.  It was recently announced that the European Banking Authority found that the capital shortfall in EU banks is 8 percent higher than originally thought. Thus, in the aggregate, European banks need to raise €114.7 billion (approx. $149.1 billion) as an exceptional, temporary capital buffer against sovereign debt exposures and to ensure their individual Core Tier 1 capital ratio reaches 9 percent of risk-weighted assets by the end of June 2012.

The banks seem to be counting on deleveraging to help resolve their capital problems.  Loans are reported as assets on a bank’s balance sheet.  As households, corporations and governments continue to repay debt in order to shore up their balance sheets, banks reduce assets, which helps their balance sheets.  However, deleveraging cannot be the sole method of recapitalizing banks.  Doing so would result in a severe decline in lending activity, which in turn would cause large-scale economic damage.

What may be concerning investors (it worries me, anyway) is that the deleveraging process is well under way. In a recent research column, “Delveraging in the Eurozone,” Stephen Kinsella, Lecturer in Economics in the Kemmy Business School, University of Limerick, and Vincent O’Sullivan
Member of the FS Regulatory Centre of Excellence at PricewaterhouseCoopers, UK, note that “We can clearly see the deleveraging taking place within banks like Commerzbank ([loan-to-deposit ratio:] 137 to 123) or DNB (175 to 167), and we can see other banks with much larger loan-to-deposit ratios with less deleveraging taking place, like Danskebank (217 to 213), Swedbank (228 to 217), and Svenska (240 to 222). Even within this sample, there are clearly risks to deleveraging, and banks proceeding at different paces.“

With deleveraging well under way, and no coordinated effort to manage the process in sight, investors may be waiting to see whether the process results in one big drop in asset prices in 2012, representing a great buying opportunity, or whether the process may be more drawn out.  Kinsella and O’Sullivan write: “Many analysts believe, however, that this deleveraging is just a start, and European banks will have to reduce their balance sheets by €1.5 to €2.5 trillion over the course of the next 18 months to meet more stringent capital requirements, according to research from Morgan Stanley (2011). Many private equity firms and hedge fund managers are eying up opportunities for bargains in 2012 on the back of anticipated deleveraging (The Economist 2011). Others believe the correction will be more protracted, probably drawn out over a ten-year period and with a trajectory similar to Japan’s financial woes during the 1990s.”

Part of the tension comes from the notion that governments will not let assets prices fall below a certain threshold.  Meaning that public bailouts of weaker Eurozone banks would occur before an asset dump would drive prices further down.  In addition, given the recent stock prices declines for Bank of America and Citigroup, investors are clearly concerned that European banks are not the only vulnerable financial institutions.  Investing just keeps getting trickier.

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Posted in Central Banks, Economy, European Central Bank, European Union

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Federal Reserve Board Releases Minutes of November 1-2, 2011, FOMC Meeting

Posted on November 22, 2011 by | Leave a comment

The Federal Reserve Board and the Federal Open Market Committee (FOMC) on Tuesday, November 22, 2011, released the minutes of the FOMC meeting held on November 1-2, 2011. A summary of economic projections made by Federal Reserve Board members and Reserve Bank presidents for the November 1-2, 2011 meeting is also included as an addendum to these minutes.

The minutes for each regularly scheduled meeting of the Committee ordinarily are made available three weeks after the day of the policy decision and subsequently are published in the Board’s Annual Report. Summaries of economic projections are released on an approximately quarterly schedule. The descriptions of economic and financial conditions contained in these minutes and in the Summary of Economic Projections are based solely on the information that was available to the Committee at the time of the meeting.

It appears from the minute that the FOMC members considered additional measures to help the economy. “However, it was noted that any such accommodation
would likely be more effective if it were provided in the
context of a future communications initiative, and most
of these members agreed that they could support retention
of the current policy stance at this meeting. One
member dissented from the policy decision on the
grounds that additional monetary policy accommodation
was warranted at this time.”

That dissenter was Federal Reserve Bank of Chicago President Charles Evans. “Mr. Evans dissented because he saw the high unemployment
rate and the outlook for only weak economic
growth as calling for additional policy accommodation
at this meeting. Moreover, the longer the current situation
of low resource utilization lasted, the more the
economy’s longer-term growth potential could be impaired.
Furthermore, given current policy, his outlook
was for inflation to come in below levels consistent
with the Committee’s dual mandate, bolstering the case
for additional monetary easing at this time. He also
believed policies with more-explicit forward guidance
about the economic conditions under which exceptionally
low levels of the funds rate could be maintained
would improve the prospects for growth and employment
and, while possibly admitting somewhat higher
inflation for a time, would still safeguard price stability.”

The next FOMC meeting is scheduled for Dec. 13, 2011.  It is very likely that the Fed will announce some new action to help the economy, especially if Europe continues to melt down and if the U.S. Congress gets nowhere debt negotiations.

Below is a link to a .pdf file of the FOMC minutes:

FOMC Minutes 2011_11_02

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With Three Dissenters, Fed Formally Announces $400 Billion “Operation Twist”

Posted on September 21, 2011 by | Leave a comment

At its September 2011 meeting, the Federal Open Market Committee of the U.S. Federal Reserve voted to begin the much-anticipated program of exchanging the short-term Treasury securities on the Fed’s balance sheet for longer-term government securities.  The program, known as “Operation Twist”—a moniker given to a similar program in the 1960s—is intended to keep longer-term interest rates low.  For example, mortgage rates are generally tied to the yield on the 10-year Treasury bond and by buying 10-year Treasuries, the Fed will lower the yield, thus lowering rates on mortgages and other types of consumer loans.  The hope is that this will encourage consumers to borrow money to buy houses and other goods.

Operation Twist will unfold as follows: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

The only other change in policy announced by the FOMC is that it will now reinvest principal repayments of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  The hope here is to create more liquidity in mortgage credit markets, which in turn may cause lenders to ease lending standards.

Equity markets were expecting a lot more quantitative easing from this meeting, so it will be interesting to see how they respond in the next few weeks.  Of course, the FOMC noted that it discussed other tools and will monitor the economy to determine whether additional easing is necessary.  However, with three members voting against this latest action (the same three who voted against extending the zero-interest rate policy through 2013 last month), it may be difficult to get the group to go along with more QE.

The full text of the FOMC follows:

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

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U.S. Fed Discussed Monetary Easing Options at August Meeting

Posted on August 30, 2011 by | Leave a comment

The U.S. Federal Reserve Board has released the minutes of the meeting of its Federal Open Market Committee on August 9, 2011.  The minutes show that the FOMC members discuss monetary policy options designed to help boost an economy that they generally believed to be weakening.  There was nothing new among the options, which included additional asset purchases and selling shorter-term Treasurys while simultaneously buying longer-term Treasurys to help lower long-term rates.  This latter is known as Operation Twist.  Its intended effect is to lower rates on all types of consumer and business loans, which are generally based on the yield of the 10-year Treasury bond. However, as the Fed still has not learned, lower mortgage rates are not boosting home buying – the issue is one of demand and falling household wealth, not affordability.  But anyway, those were the main issues discussed.

The dissenters observed that more monetary easing would not have a significant impact on economic growth, but would add to inflation problems by boosting the price of commodities. However, it seems the rest of the group would rather not believe that, even though most of us in the real economy are finding our grocery and gas pump bills going higher almost every month.

The FOMC agreed to hold its September meeting over two days, rather than the scheduled one day, to have more time to discuss the economy.  It seems that, unless inflation continues to be a problem, the FOMC will move forward with some kind of quantitative easing program, regardless of what they may actually call it.  This likely means that commodity prices will shoot higher once again and risk assets will be attractive.  How long that will last is anyone’s guess, but I would be inclined to believe that the duration will be much shorter than the rally that followed the second quantitative easing program last fall.  In other words, something less than one year, possibly only a couple of months.  These comments are not intended to help or encourage anyone to time the market – that is impossible and an excellent way to lose money.  Rather, we should acknowledge that there are significant structural problems in debt markets around the world that cannot be resolved by waving the quantitative easing magic wand.

QE is meant to spread the damage out over a longer period of time.  The result is that, instead of having a Great Depression-like event, our growth drags over a period of 5, 10, or even 15 years – see Japan over the last 20 years for an example.

For the full FOMC minutes in .pdf form, please click the following link: FOMC Meeting Minutes August 9, 2011

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