michael hanson

Fed Officials Consider Early End of Easing

Federal Reserve policy makers were considering scaling back their huge stimulus effort slightly earlier than expected if the economy shows signs of strength, according to minutes released Wednesday of their most recent meeting last month.

While experts interpreted the comments as being slightly less accommodative in terms of monetary policy than anticipated, they were quick to note that the meeting took place before last Friday’s report on unemployment and job creation in March, which was much weaker than expected.

Since last year, the Fed has been purchasing $85 billion a month in Treasury bonds and mortgage-backed securities in an effort to keep interest rates ultralow and spur economic growth.

Despite the possibility the Fed might pull back on stimulus efforts early, stocks on Wall Street rallied to new highs in midday trading Wednesday, with the Standard Poor’s 500-share index and the Dow Jones industrial average both rising by more than 1 percent.

Until the most recent report on unemployment, there were signs the labor market was picking up steam, a crucial criteria in helping Fed policy makers decide when to scale back the bond purchases.

Since Friday’s report, however, worries have returned that slow levels of job creation will keep unemployment at historically high levels. The jobless rate was 7.6 percent in March, much higher than normal for this stage of a recovery. And the economy created only 88,000 jobs in March, a far cry from the 268,000 jobs added in February.

“They were seeing a different world than they’re seeing today,” said Michael Hanson, senior United States economist at Bank of America Merrill Lynch. Besides the weak jobs figures, recent data for manufacturing has been soft, while consumer confidence remains mixed.

The meeting, held on March 19 and 20, came after a series of more positive indicators in January and February, Mr. Hanson said.

The Federal Reserve has said it plans to continue the stimulus efforts until there is “substantial improvement” in the labor market outlook.

The minutes of the policy meeting show that the more dovish Fed officials favored continuing the bond purchases at least through the end of the year, while more hawkish ones argued the purchases should be scaled back in the middle of 2013 and finish by December.

“Several” members of the Fed’s Open Market Committee “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” according to the minutes.

Two members of the committee indicated the purchases should continue at the current pace through the end of 2013, while one argued they should be trimmed back immediately. More hawkish Fed officials worry the stimulus efforts could artificially push up prices, while increasing the risk of a rapid run-up in rates once the stimulus is withdrawn.

The chairman of the Federal Reserve, Ben S. Bernanke, has been supportive of the continued asset purchases.

“But it does seem that outside his core supporters, members are wavering,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors. “But remember the March payroll data were not known at this meeting, and the tone will likely be different next time. Still, our antennas are twitching a bit.”

The Fed was forced to release the minutes five hours early, at 9 a.m. Eastern time, after officials realized they had inadvertently been distributed Tuesday afternoon to more than 100 Congressional staff members and trade organization officials.

The minutes are closely watched by traders and investors for any clue about Fed policy, making them among the most market-sensitive documents the government releases. Participants in the multitrillion dollar bond market follow the zigs and zags of the Fed especially intently, since even a small move in rates can move bond prices sharply.

“The reason is they were inadvertently sent early to a list of individuals who normally receive the minutes by e-mail shortly after their usual release time,” the Federal Reserve said in a statement. The error was traced to the Fed’s Congressional liaison office and a mistake there by an employee, Brian Gross, who has worked at the Fed for a decade. “This was human error,” said one Fed official who insisted on anonymity because of the sensitivity of the matter.

There was no indication that any of the recipients profited through the early release by trading on the information, but the Federal Reserve’s inspector general has been asked to review release procedures in light of the incident. The Fed also said it alerted the Securities and Exchange Commission as well as the Commodity Futures Trading Commission.

Like many experts, Mr. Hanson foresees growth slowing in the second and third quarter of 2013, following what he estimates was a 3 percent increase in output in the first quarter.

Most of that is because of tightening fiscal policy from Washington, Mr. Hanson said, as the government’s automatic spending cuts imposed by Congress go into effect. He estimated growth would come in at 1.3 percent in the second quarter and 1.5 percent in the third quarter.

Despite the more hawkish tone of the minutes, Mr. Hanson said, “We think the Fed’s going to be buying into 2014, tapering off in the spring and not finishing until the fall of 2014.”

Article source: http://www.nytimes.com/2013/04/11/business/economy/fed-officials-split-over-end-of-easing.html?partner=rss&emc=rss

Financial Turmoil Evokes Comparison to 2008 Crisis

Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008.

The answer is a matter of fierce debate among economists and market experts. Many say the risks are lower today — at least in terms of an immediate crisis — because the financial system over all is healthier and there are fewer hidden problems. But the experts add that there are reasons to worry, and they do not rule out a quick downward spiral if politicians in the United States and in Europe cannot calm investors by addressing fundamental financial threats.

The core problem, as it was three years ago, is too much debt that borrowers are having a hard time repaying — but this time it is government debt rather than consumer debt.

“So far it’s not as bad as 2008, but it could get much worse because the sovereign debt concerns are much more global than the subprime mortgage risk of 2008,” said Darrell Duffie, a professor of finance at Stanford and an expert on the banking system.

A growing lack of confidence is perhaps the most troubling similarity to 2008 and the biggest worry. “There’s a level of fear out there that is a little similar,” said Michael Hanson, a senior economist with Bank of America Merrill Lynch. “It’s not just the fundamentals. It’s the fear of the unknown.”

Most of the attention so far has been focused on volatility in stocks, with investors spooked by three heart-stopping declines in the last five trading days — including Wednesday’s 4.6 percent drop in the Dow Jones industrial average.

But the bigger concern of many financiers and government officials was signs of stress on Wednesday in European credit markets, which are essential to financing the day-to-day operations of banks and companies there.

Unlike the 2008 crisis, which began in the United States and spread worldwide after the bankruptcy of Lehman Brothers and the near collapse of the giant insurer American International Group as subprime mortgage defaults surged, today’s situation began overseas. The mounting fear about European banks’ exposure to sovereign debt is now fraying nerves here.

Financial institutions across Europe have huge holdings of government and corporate bonds from Greece, Ireland, Portugal, Italy and Spain. Concerns about defaults are growing.

Some insist that the comparisons are overblown. “It feels completely different,” said Larry Kantor, the head of research at Barclays Capital. “I don’t think there is a U.S. debt crisis right now, and European debt is not held as broadly as mortgage debt or derivative debt was back in 2008. The prospect of a 2008-like drop in the market is remote.”

Experts add it is important not to confuse a stock market rout with an all-out panic.

“I think it’s quite different than 2008,” said John Richards, head of strategy at RBS in Stamford, Conn. “This is a stock market correction based on slower growth and the increased probability of a recession. In 2008 we had a genuine funding crisis, where banks were reluctant to lend to one another.”

Others on Wall Street maintain that the turmoil is playing out in similar fashion. Traders compare the threat from Greece that prompted the sovereign debt crisis a year ago to Bear Stearns, whose fall in March 2008 was a dress rehearsal for the broader crisis that followed six months later. For these would-be Cassandras, the huge debt loads of Italy and Spain are now equivalent to Lehman and A.I.G., institutions whose downfalls threatened the stability of the entire system.

In an ominous echo of 2008, European bank stocks on Wednesday fell 10 percent or more — and banks in Europe are beginning to hoard cash, crimping the interbank loans that keep the global financial system operating smoothly. While borrowing costs for banks in the United States and Britain have crept up only slightly recently, borrowing costs for Continental banks that lend to one another have doubled since the end of July.

More optimistic market watchers point out that these rates are still well below those at the height of the financial crisis. But they nonetheless are the highest since the spring of 2009.

Because European banks trade billions of dollars daily with their American counterparts, fears of contagion have spread.

Along with the fear is a measure of denial in the period leading up to now, one more echo from 2008. Even as evidence of the subprime threat mounted through 2007 and into 2008, stocks continued to levitate, with the Dow industrials touching 13,000 not long after Bear Stearns had to be rescued. And even as the economy weakens, Wall Street is still predicting earnings in the fourth quarter to be 23 percent above last year’s level, a target that is looking more out of reach by the day.

Then, as now, there were huge stock market swings, up as well as down. For example, the Dow plunged 777 points on Sept. 29, 2008, after Congress initially rejected the proposed Troubled Asset Relief Program bank bailout, only to rise 485 points the next day. But over all they kept plunging, with the Dow bottoming out at 6,547 in March 2009.

There are, however, some very important differences between now and then that could make the banks more resilient.

Article source: http://www.nytimes.com/2011/08/11/business/financial-turmoil-evokes-comparison-to-2008-crisis.html?partner=rss&emc=rss

Fed Officials Consider Early End of Easing

Financial Turmoil Evokes Comparison to 2008 Crisis

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