federal reserve

Fed Set to Introduce Communications Policies This Week

January 23, 2012 by NewsMaker Leave a Comment

While the changes could make it easier for the Fed to move ahead with another round of asset purchases later this year, by helping to explain why the economy needs additional stimulus, officials have indicated that any such plans remain on the back burner, and may stay there so long as the economy continues to recover.

Indeed, the Fed is able to focus on communication in part because it is no longer devoting all of its energies to crisis management. These are improvements that the Fed’s chairman, Ben S. Bernanke, has waited five years to make, reflecting his vision for how the Fed should operate in periods of calm, too.

The centerpiece of the new policies is a plan to publish the predictions of senior Fed officials about the level at which they intend to set short-term interest rates over the next three years — including when they expect to end their three-year-old commitment to keep rates near zero. The Fed also will describe the expectations of those officials for the management of the central bank’s vast investment portfolio.

The first forecast will be published after a two-day meeting, starting on Tuesday, of the Federal Open Market Committee, which sets policy for the central bank. The committee also is considering the publication of a statement describing the Fed’s goals for the pace of inflation and level of unemployment, which it has never formalized.

“Our moves toward greater openness in recent years have made our policies more effective and helped the public understand the Fed’s actions better,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said in a recent speech.

Any bolder steps, he said, “will depend on how economic conditions develop.”

This is not the first time the Fed has tried to get past crisis management. And after several false starts in which it overestimated the strength of the recovery, officials have been careful to insist that they still stand ready to do more if necessary.

The economy, after all, is merely muddling along. While economists calculate that fourth-quarter growth was relatively strong, most forecasters expect a much slower pace of growth in the new year. The Fed’s own forecast, which will be updated Wednesday, anticipates growth of up to 2.9 percent. Most other guesses are lower.

Unemployment also remains a deep and prevalent affliction. Almost 24 million Americans could not find full-time work in December; the unemployment rate has ticked downward in part because many people have stopped looking for work.

Senior Fed officials have also sought to focus attention in recent months on the depressed condition of the housing market, arguing that other parts of the government can and should do more to help homeowners and revive sales. Some Fed officials have advocated that the Fed buy large quantities of mortgage-backed securities, which could further reduce interest rates on mortgage loans.

But several Fed officials have said in recent speeches that they are hesitant to support new efforts to improve growth, because they think monetary policy has exhausted most of its power, and because they are worried about inflation.

“Steady even if unspectacular growth accompanied by inflation in the neighborhood of 2 percent justifies some reluctance to change, in either direction, the F.O.M.C.’s accommodative policy,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech this month.

Mr. Lockhart added a standard caveat for Fed officials, that the persistence of high unemployment required the Fed to keep thinking about doing more.

“Now is not a time to lock into a rigid position,” he said.

But Fed officials have made clear that high unemployment is an insufficient cause for additional action, at least as long as inflation remains near 2 percent.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a recent speech that the economy would not create enough jobs to return unemployment to normal levels for “perhaps even four or five years.”

“Sooner, of course, would be better for everyone,” she said. “But I want to be on a path toward full employment that
doesn’t create an inflation problem down the road.”

The communications changes that the Fed plans to announce Wednesday mark the furthest advance in a 20-year-old campaign to increase the transparency of its decision-making as a means to increase the impact of its policies. As recently as the early 1990s, the Fed still did not regularly announce the decisions reached at its policy meetings. Now it plans to start publishing predictions about the outcomes of future meetings to guide investor expectations.

The Fed disclosed its plans this month when it released a description of the committee’s most recent meeting, in December. On Friday it followed up by releasing the templates that will be used to publish the predictions.

The predictions themselves could have a mild effect on markets. The Fed said this summer that it would maintain short-term rates near zero through middle of 2013, at least. Mr. Bernanke has since underscored the words “at least,” and analysts expect the forecast will show that most members of the committee intend to hold rates near zero into 2014.

Pushing back that timetable will tend to reduce interest rates, but the impact is likely to be minor, as asset prices already reflect an expectation that rates will not rise before 2014.

“In policy terms, this is a historic change,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a note to clients. “In practical terms, however, the change isn’t going to have any major impact.”

Article source: http://feeds.nytimes.com/click.phdo?i=26cb1f7aa08ec27f1f256f311fb2e63e

Filed Under: Business News Tagged With: bernanke, fed officials, federal reserve

Economix Blog: Measuring the Top 1% by Wealth, Not Income

January 18, 2012 by NewsMaker Leave a Comment

Chang W. Lee/The New York Times

After our demographic profile of the 1 percent appeared on Sunday, there were a lot of questions from readers about the top 1 percent by wealth, rather than the measure we used, the top 1 percent by income.

The 1 Percent

Looking at the top of the economic strata.

We used income because the Census measures income, not wealth, and the Census contains the most timely data along with a large sample size, making it possible to look at income across many geographic and demographic categories.

But we also examined wealth through the Federal Reserve’s 2007 Survey of Consumer Finances. This survey is much smaller in scope, and somewhat outdated (a release based on the 2010 survey is expected later this year).

But an analysis of the Fed data is still revealing in that it shows the wealth gap, as measured by net worth, is much more extreme than the chasm as measured by income.

The Times had estimated the threshold for being in the top 1 percent in household income at about $380,000, 7.5 times median household income, using census data from 2008 through 2010. But for net worth, the 1 percent threshold for net worth in the Fed data was nearly $8.4 million, or 69 times the median household’s net holdings of $121,000.

Some readers wondered if the 1 percent by wealth weren’t an entirely different group of people from the 1 percent by income. But there is substantial overlap: the Fed data suggests that about half of the top 1 percent of earners are also among the top 1 percent in the net worth category.

Almost all the rest of the top earners are still in the top 5 percent when it comes to net worth.

As for high-net-worth families and how much they earn – more than 80 percent of them are in the top 5 percent when it comes to income.

Other nuggets about the wealthy from the 2007 Fed data:

— The wealthiest 1 percent took in about 16 percent of overall income — 8 percent of the money earned from salaries and wages, but 36 percent of the income earned from self-employment.

— They controlled nearly a third of the nation’s financial assets (investment holdings) and about 28 percent of nonfinancial assets (the value of property, cars, jewelry, etc.). These measures will be particularly interesting to revisit when the new, post-recession data arrives.

— Money may not buy happiness, but the Fed survey suggests it buys good health. About 90 percent of the 1 percenters describe themselves as being in excellent or good health, compared with 75 percent of everybody else. About 85 percent expect to live into their 80s, compared with 68 percent of everybody else.

— Nearly half of the 1 percenters own two or more pieces of real estate. That was true for just 5 percent of the rest of the population.

— Nearly a third of 1 percenters own a vehicle besides a car, compared with 14 percent of other households. And not just in the driveway. While the rest of us are slightly more likely to own a mobile home, 1 in 5 of the wealthiest Americans say they have a boat, plane or helicopter, compared with 1 in 22 in other households.

— About three-quarters of the wealthy said they spent less than they earned in the previous year, compared with about 44 percent of everybody else. This is also a category that will be fascinating to track in the post-recession data.

— When asked if they feel “lucky” in their financial affairs, nearly 80 percent of the super-rich strongly agreed. The rest of us? Fewer than one-third feel that financial good fortune is shining upon us.

Article source: http://feeds.nytimes.com/click.phdo?i=b9a836f059aa449a7970fff48ae19441

Filed Under: Economy News Tagged With: federal reserve, nuggets, scope

Fed Returns $77 Billion in Profits to Treasury

January 11, 2012 by NewsMaker Leave a Comment

WASHINGTON — The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer but much more than in any other previous year.

The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.

Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.

Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

But Fed officials note that this cycle — payments flowing from Treasury to the Fed and then back to the Treasury — still saves money for taxpayers because those interest payments otherwise would be made to other investors.

“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.

The scale of the transfers grew rapidly after the financial crisis.

The Fed made an average annual contribution to the Treasury Department of $23 billion during the five years preceding the crisis. In the years since 2007, the Fed’s average contribution has more than doubled to $54 billion.

The Fed transferred $79.3 billion in 2010. Its investment portfolio grew again in 2011, approaching $3 trillion, but profits fell modestly as the Fed reduced some more lucrative holdings, like its support for the insurance company American International Group, and expanded its holdings of low-yield government debt.

Notwithstanding its conservative investment portfolio, the central bank remains highly profitable because of its unique business model. Rather than paying for funding, it simply creates the money that it needs at no cost. The return on its investments, as a result, almost all flows directly to the bottom line.

Still, the model is not foolproof. The Fed could decide to undermine its own profitability if it concluded that the pace of inflation was increasing. Fed officials have said that they would respond to inflationary pressures through a combination of selling assets and raising short-term interest rates, which would have the effect of undercutting the value of those assets just as they were being sold. The Fed also could conclude that it needed to pay higher interest rates to banks that keep reserves on deposit with the central bank, to discourage withdrawals of that money.

In addition to the money sent to the Treasury, the Fed spent $4.5 billion on its own operations, including its expanded role as a regulator of the largest financial companies. The 2010 law overhauling financial regulations also requires the Fed to provide funding for two new agencies, the Consumer Financial Protection Bureau and the Office of Financial Research. The bill totaled $282 million last year. Other federal financial regulators are financed by the industries that they oversee. Both systems are intended to shelter regulators from political pressure.

The results reported Tuesday are preliminary. The 12 regional banks that compose the Federal Reserve system will publish final financial results in a few months. If there is a change in estimated profits, the Fed will adjust the amounts that it pays to the Treasury this year. The contributions are made weekly.

Article source: http://feeds.nytimes.com/click.phdo?i=73c09c03edfafde7c8e845a656178516

Filed Under: Economy News Tagged With: federal reserve, financial crisis, mortgage backed securities

Economix Blog: Fed Lashes Out at ‘Errors’ in Reporting

December 7, 2011 by NewsMaker Leave a Comment

6:27 p.m. | Updated with elaboration on Bloomberg News response.

The Federal Reserve unleashed an unusual attack Tuesday on Bloomberg News, charging in a letter to members of Congress that stories about its bailout programs “have contained a variety of egregious errors and mistakes.”

The letter, signed by the Fed chairman, Ben S. Bernanke, showed that the central bank remains deeply concerned that public anger about its actions during the financial crisis will have political consequences, like new limits on its freedom of action.

The letter did not name Bloomberg, but the details make clear that the Fed is responding to an article by Bloomberg Markets magazine that was published last week. The article reported that cheap loans from the Fed allowed banks to pocket about $13 billion in profits during a two-year period ending in March 2009.

The article also reported that the central bank provided $7.8 trillion in total aid during that period, more than half to the nation’s six largest banks.

The Fed said that it disputed both calculations. The letter notes that the volume of loans outstanding at any one time never exceeded $1.5 trillion. And it says that those loans generally carried interest rates above the market rate, meaning that banks did not generate additional profits by leaning on the Fed.

A Bloomberg News spokesman, Ty Trippet, said: “We have met with the Fed numerous times on this issue and not once has the Fed ever told us our reporting on this issue is inaccurate. We stand by our reporting.” The organization also issued a point-by-point rebuttal.

The Fed letter also airs a number of other complaints, none of which obviously amount to an “egregious error” or a mistake. For example, it says that journalists should not describe Fed programs as secret because the central bank publicized the amounts that it lent, even though it refused to identify the recipients.

Article source: http://feeds.nytimes.com/click.phdo?i=3a404cb59b8f96f584c1c2c47553e265

Filed Under: Economy News Tagged With: cheap loans, federal reserve, public anger

Economix Blog: How the Fed Rescue Benefited Banks

November 28, 2011 by NewsMaker Leave a Comment

A report by Bloomberg News offers a new way of quantifying the Federal Reserve’s vast efforts to save financial companies from collapse during the crisis that peaked in 2008.

The central bank provided emergency loans, asset purchases and other aid totaling roughly $7.8 trillion during a two-year period ending in March 2009, easily the largest component of the government efforts to bulwark the financial system.

In an article in the January issue of Bloomberg Markets, published online Sunday night, Bloomberg offers an estimate that the aid allowed financial companies to book profits of roughly $13 billion during that period, largely by borrowing from the Fed at low interest rates and then using the money to make loans and investments with higher rates of return.

The benefit for the six largest American banks was about $4.8 billion, according to Bloomberg’s calculations, or roughly one-quarter of their total profits over the two years.

The profit estimate is based on the simple expedient of multiplying the amount each firm borrowed from the Fed by its net interest margin – a key indicator of bank profitability that measures the difference between the amount the bank pays to get money and the amount it charges to provide money. In other words, the Bloomberg calculation basically assumes that banks invested the money they got from the Fed at roughly the same rate of profitability as money they acquired from other sources.

The estimate may well overstate the direct value of the Fed’s loans, as banks used much of the money for short-term purposes that tend to have lower profit margins. Importantly, however, it also greatly understates the broader value of the loans: The money helped many recipients to survive.

Citigroup is a case in point. Bloomberg estimates that the Fed’s loans increased the bank’s profits by $1.8 billion. The real story, of course, is that government help saved the troubled bank from collapse.

Article source: http://feeds.nytimes.com/click.phdo?i=a0061e4cce9dae006c31092877c8cf48

Filed Under: Economy News Tagged With: collapse, federal reserve, profit margins

Fed Cuts Forecast for Economic Growth

November 2, 2011 by NewsMaker Leave a Comment

The Fed predicted that the economy would expand between 2.5 percent and 2.9 percent in 2012, and between 3 percent and 3.5 percent in 2013. Both ranges are significantly lower than its last projections, made in June.

The Fed also predicted that the rate of unemployment would remain above 8.5 percent at the end of 2012, and above 7.8 percent at the end of 2013.

These forecasts, published four times a year, do not have a particularly good track record, but they do offer a window on the state of the policymakers’ minds. In a word: Glum.

Nevertheless, the Fed announced no new measures to stimulate growth Wednesday following a two-day a meeting of its policy-making committee, although it said that it remained concerned about the fragile health of the economy.

The Fed’s assessment was somewhat brighter than after its last meeting in September. Growth has “strengthened somewhat,” it said, thanks in part to stronger consumer spending. But the central bank continued to note “significant downside risks to the economic outlook, including strains in global financial markets.”

“The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually,” the Fed said in a statement released after the meeting, held every six weeks.

Charles Evans, the president of the Federal Reserve Bank of Chicago, dissented from the decision to do nothing. He argued for new measures to spur growth, echoing recent speeches in which he has criticized the Fed for caring more about inflation than unemployment. It was the first time since 2007 that a board member has dissented in favor of doing more.

The Fed had announced new efforts to spur the economy after each of the last two meetings of the Federal Open Market Committee.

In August, the Fed announced its intention to maintain short-term interest rates near zero for at least two more years, provided that inflation remained low — a decision left unchanged Wednesday. In September, it decided to further reduce long-term interest rates by shifting $400 billion from investments in short-term Treasury securities to longer-term Treasuries.

The 9-1 decision to pause now comes as the economy has shown signs of improving health in recent weeks, highlighted by the government’s estimate that growth rose to an annual pace of 2.5 percent in the third quarter. At the same time, the rate of inflation continues to decelerate more slowly than the Fed had expected, although markets continue to show little concern about it.

Fed officials also have doubts about their ability to increase the pace of growth, arguing that the lack of demand that is holding back the economy must be addressed by fiscal policy, meaning changes in taxation or government spending.

The combination of factors has postponed for now any movement toward a new round of stimulus, such as the proposal by the Fed Governor Daniel K. Tarullo last month that the Fed should consider buying large quantities of mortgage-backed securities to spur the housing market.

Fed officials have been careful to say that they remain willing to expand the central bank’s massive investment portfolio if economic conditions deteriorate. The statement repeated the Fed’s boilerplate promise that it “is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”

But this meeting was more of a test of what the Fed was willing to do when the economy is merely muddling. The answer is nothing new.

Article source: http://www.nytimes.com/2011/11/03/business/economy/fed-holds-rates-and-strategy-steady.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal reserve, federal reserve bank, six weeks

Bucks Blog: ING Direct Drops Rate on Its Savings Account

October 25, 2011 by NewsMaker Leave a Comment

The foreseeable future may already be here, it seems.

ING Direct dropped the rate paid on its Orange savings account from 1 percent annual percentage yield to 0.9 percent as of Oct. 21, according to the online bank’s Web site.

It’s true that interest rates are low, and that the fine print on the Orange savings disclosure does say that ING Direct “may change the interest rate for your account at any time.”

But it’s also true that in response to customer outrage over Capital One’s proposed acquisition of ING Direct, a Capital One spokeswoman said in June: “We have no plans to make any significant changes. ING customers should expect the same great customer experience and the `status quo’ from ING for the foreseeable future.”

Another Capital One spokeswoman said in an e-mail on Monday, “The ING deal has not closed yet … you’ll have to check in with them on their rate moves.” (The acquisition is awaiting approval by the Federal Reserve).

“Our rates remain competitive,” said an ING Direct spokeswoman, Cathy MacFarlane. “Although they fluctuate, our commitment to saving our customers time and money does not.” She referred questions about the reason for the rate change to ING Direct’s Dutch parent, the ING Group. We’ve asked it for comment and will update the post accordingly once it responds.

The move may not bode well for ING Direct savings account customers. Some of ING Direct’s online competitors, like American Express, Sallie Mae and Discover, are still offering savings rates of 1 percent A.P.Y.

Capital One, ING Direct’s prospective new parent, is offering 0.85 percent on its savings account, though you can earn bonus interest in each quarter if you maintain a balance of $10,000 or more.

Do you think ING Direct’s reduction of its interest rate, which equates to a 10 percent drop, is reasonable?

Article source: http://feeds.nytimes.com/click.phdo?i=bd0f1165495574e89862437a1158b000

Filed Under: Your Money Tagged With: annual percentage yield, federal reserve, sallie mae

Economix Blog: Bernanke’s Lessons From the Financial Crisis

October 18, 2011 by NewsMaker Leave a Comment

Scott Eisen/Bloomberg NewsBen S. Bernanke at a Boston Fed conference on Tuesday.

What did the financial crisis teach central bankers?

The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that the great lesson was the need to juggle two jobs: the traditional work of managing the pace of inflation and the forgotten job of maintaining financial stability.

Mr. Bernanke’s speech largely amounted to a defense and explanation of the Fed’s conduct during the crisis. The lessons he described included the propriety of the Fed’s existing approach to monetary policy and the necessity of its various innovations, including lending dollars to other countries.

But the Fed chairman acknowledged, as he has before, that the Fed and other central banks had neglected the work of financial supervision.

“The crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively,” Mr. Bernanke said at an annual policy conference hosted by the Federal Reserve Bank of Boston.

One of the great questions left by the housing crash is whether the Fed could have popped the bubble at an earlier stage, limiting the damage. Mr. Bernanke said Tuesday that the Fed does have a responsibility to address emerging problems, something that central bankers long described as impossible or inappropriate.

Mr. Bernanke said, however, that he agreed with “an evolving consensus” that this work required different tools than those for monetary policy.

“In my view, the issue is not whether central bankers should ignore possible financial imbalances — they should not — but, rather, what ‘the right tool for the job’ is to respond to such imbalances,” he said.

The Fed, by adjusting interest rates, can deflate the economy, but there is no obvious mechanism for focusing the impact on a specific asset class, like housing.

Instead, Mr. Bernanke said that the tools of financial regulation were the best means for maintaining financial stability, through limits and requirements on the ways financial institutions lend and borrow.

Mr. Bernanke said that the crisis had tested what he described as the consensus model of monetary policy but that in his view it had emerged largely unscathed.

He described this model as “flexible inflation targeting,” meaning that the Fed seeks to maintain a steady rate of increase in prices and wages of about 2 percent a year, with a willingness to make short-term adjustments to encourage employment growth, and an emphasis on communication and transparency.

He closed with a reminder that it would take some time to fully understand the lessons of the crisis. Perhaps he was thinking of his own academic career, devoted to the mechanics of the Great Depression, 80 years ago. Or perhaps it was a recognition that this crisis remains very much in progress.

Article source: http://feeds.nytimes.com/click.phdo?i=ea0a491e99f73c7effd1ea2992d6f9d0

Filed Under: Economy News Tagged With: fed chairman, federal reserve, propriety

DealBook: DealBook Off the Record

October 8, 2011 by NewsMaker Leave a Comment

In the latest installment of DealBook’s animated series, Ben S. Bernanke, chairman of the Federal Reserve, goes to see his psychiatrist.

Animation software by Xtranormal.

Article source: http://feeds.nytimes.com/click.phdo?i=33307e6ae5ef3f534d9cf067951fa857

Filed Under: Business News Tagged With: bernanke, federal reserve, psychiatrist

Fed Chief Raises Doubts on Recovery

October 4, 2011 by NewsMaker Leave a Comment

Mr. Bernanke said that the Federal Reserve has acted forcefully to support growth and that it stood ready to do more. But he emphasized that the rest of the government also needs to act on problems including the federal debt, unemployment, housing, trade, taxation and regulation.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

Mr. Bernanke began his testimony Tuesday by repeating his basic assessment that the economy has grown more slowly than expected, because of unexpected setbacks like the Japanese earthquake and the European debt crisis and because of domestic problems like the ongoing housing crisis.

“The recovery from the crisis has been much less robust than we hoped,” he said, although he also reiterated that the Fed expects faster growth going forward.

The Fed’s primary policy focus is on the pace of price increases, or inflation, which it seeks to maintain at a steady annual rate of about 2 percent. Prices have increased more quickly over the last year, but the Fed has predicted that the increases will abate, and Mr. Bernanke reiterated that forecast Monday.

But Mr. Bernanke’s description of the economic outlook sounded slightly more worried. He has previously said that the economy would recover so long as the government did nothing to interfere, for example through severe short-term spending cuts. On Tuesday, he seemed to suggest that the government needed to act to preserve the recovery.

“We need to make sure that the recovery continues and doesn’t drop back,” Mr. Bernanke told the Joint Economic Committee.

Mr. Bernanke said that the Fed has not exhausted its options.

The central bank, he said, “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability.”

But his emphasis once again was on the need for the rest of the government to act.

He said that the government should keep four goals in mind: reducing debts to a level that was sustainable in the long term; avoiding short-term reductions that could impede recovery; adjusting spending and tax policies to support growth; and improving the government’s decision-making process.

“There is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy,” Mr. Bernanke said.

Article source: http://feeds.nytimes.com/click.phdo?i=535f2730813b3a8254f4849879186da9

Filed Under: Economy News Tagged With: federal reserve, inflation, price increases