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Bernanke Mum on Rate Moves MoneyNews
(Headlines - scroll down for full stories)
Incoming Federal Reserve chief Ben Bernanke used the Economic Club of New York as a platform for his first major public speech. While he did use the occasion to say that the economy would continue to grow, Bernanke would not go out on a limb and say what the Fed would do with interest rates when it meets later this month. Investors, especially dollar speculators, are keenly interested in what the Fed will do. The Fed has raised interest rate 14 times in a row with overnight rates now at 4.50%.
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Sounding a lot like predecessor Alan Greenspan, Bernanke wrapped himself in vague economic-speak, offering few clues to investors on the Fed's next move. "The implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut," Bernanke said. Bernanke also added that a "global saving glut" - an excess of savings because of a dearth of enticing investments - could be depressing rates. If this were the case, he said, the "neutral policy rate" would be lower than otherwise to keep the economy on an even keel. But Bernanke laid out other possibilities and concluded: "The bottom line for policy appears ambiguous." Bernanke said it is hard to know why long-term rates are as low as they are. He also said that large foreign holdings of U.S. Treasury debt were pushing yields down. Bernanke said this was not the only, or even the dominant, explanation for recent market behavior. He added that if the low level of long-term rates reflected investors' willingness to take on more risk, it could mean financial conditions were stimulative. That would require higher short-term rates than otherwise necessary. "But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower," Bernanke said.
Currency markets were immediately impacted by Bernanke's remarks. "The dollar initially firmed as the market sensed that Bernanke was sounding a bit hawkish, but a second reading of his comments shows that they are balanced," said Robert Rennie, chief currency strategist at Westpac in Sydney, told Reuters. "It is one week before the next Fed meeting, so Bernanke was not going to say anything too relevant for monetary policy." Bernanke was more candid and upbeat on the subject of the U.S. economy. "Broadly speaking I think that consumer finances are consistent with continued reasonable growth in consumption and enough to keep the economy at or close to its potential output growth rates," Bernanke said in answer to a question. Editor's Note:
2. Fed's Minehan: 'Downside Risk to Growth' While Bernanke spoke in New York, Federal Reserve Bank of Boston president Cathy Minehan delivered a speech of her own to the Massachusetts Association of realtors in Boston. In it, Minehan says that the U.S. economy should experience "solid growth" this year, though a larger-than-expected slowdown in the housing market may cut into consumer spending. "We see construction diminishing somewhat and real estate prices flattening, not declining," Minehan said. "Clearly, however, we could be wrong on the magnitudes," she said, and that may be a "downside risk to growth." Economists fear that a slip in housing prices could hamper economic growth, particularly in key areas like consumer spending and job growth. The direction of the housing market is a key indicator in whether the fed will continue to raise rates or not. Bloomberg News reports that housing prices rose an average 13% in the fourth quarter from a year earlier, citing numbers from the Office of Federal Housing Enterprise Oversight, after a 12.6% gain in the prior quarter. "From a macro perspective, it makes sense to worry about the potential impact on overall GDP growth of a combination of a reduction in housing construction and a decline in household wealth," Minehan said. "If we are at all accurate, 2006 will be a year of solid growth," with a faster pace in the first half than the second because of hurricane-related rebuilding and stabilizing energy prices. "There are risks, to be sure, but as you know, monetary policy is all about risk management."
Economists surveyed by Bloomberg News earlier this month predicted the Fed would leave its rate at 5% in the second half of the year, the median of 73 forecasts, the news service said.
Minehan's boss had predicted that back in February. "It appears that the first quarter will see a significant rebound from the fourth quarter, and likely productivity will come back with it," Bernanke told the Senate Banking Committee Feb. 16.
3. Will GM Match Light Derivatives Fuse? Last week, MoneyNews reported on the close reciprocal relationship between General Motors' dire financial situation and the burgeoning - yet potentially fatally - flawed credit derivatives market. But that was before accounting errors forced GM to recalculate 2005 losses for its financing arm GMAC by $2 billion, raising the total to $10.6 billion. Now esteemed journalist Ambrose Evans Pritchard writes in London's Daily Telegraph that "the discovery of huge hidden losses at General Motors's finance arm have raised fresh fears of bankruptcy at the world's biggest carmaker, sending tremors through the credit derivatives markets." Pritchard says the upward revision saw the cost of default insurance for GMAC bonds spike by 75 basis points overnight. "Concern that General Motors may now be sliding towards the brink - linked to an estimated $200 billion in credit derivatives - has renewed fears that the overheated credit-swap market could seize up in a crisis," writes Pritchard. He reports that there are fears that simultaneous monetary tightening in the U.S., Japan and Europe "might drain much of the excess liquidity fuelling the global asset boom." As MoneyNews reported, the Fed has warned that the gargantuan derivatives market is like a wild horse out of control - and that it has developed way too fast to be controlled and supported properly by the infrastructure put in place to do so. Pritchard cites Timothy Geithner, president of the New York Federal Reserve, who says that the huge amount of new derivative vehicles may well have led to a "more dangerous combination of risk." The new derivatives "have not ended the tendency of markets to occasional periods of mania and panic," says Geithner. "They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial community from the effects of such a failure. "There are aspects of the latest changes in financial innovation that could increase systemic risk in some circumstances, by amplifying rather than dampening the movement in asset prices," he said. Now Geithner has insisted that the International Swaps and Derivatives Association (ISDA) take action to clean up its system before a real catastrophe occurs. Pritchard reports that the New York Fed president says "the 'most conspicuous' problems were in the $1.24 trillion market for credit derivatives, which has doubled in size every year for the last decade. A 'significant' proportion of total trades do not even match up, he said." America's 10 biggest banks maintain $600 billion in potential credit exposure, which makes up 175% of their financial reserves. While market traders claim that there is nothing to worry about, at least one person strongly disagrees and has put his money where his mouth is - the Oracle of Omaha, Warren Buffett. Since 2003, he has been warning that derivatives are a "ticking time bomb." Says Pritchard: "This month, [Buffett] was explaining it has cost Berkshire Hathaway $404 million to extract itself from derivatives inherited through General Re, the reinsurance group. "[Buffett] said: 'We are a canary in this business coal mine. Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully. General Re has had the good fortune to unwind its supposedly liquid positions in a benign market. It could be a different story for others in the future.'"
Editor's Note:
4. Leading Index Down in February Both the Fed and the economy received some mixed news yesterday after the Conference Board reported that the U.S. leading index decreased 0.2%, the coincident index increased 0.3% and the lagging index increased 0.1% in February. The Board reports that the leading index decreased in February following four consecutive increases. The leading index increased 1.5% from August 2005 to February 2006 (a 2.9% annual rate). The largest negative contributors to the February decrease were vendor performance index and index of consumer expectations, and the strengths and weakness among the leading indicators were balanced in February. "The leading index has been fluctuating around a more moderate upward trend since mid-2004," says the Conference Board in its monthly report. "At the same time, real GDP growth slowed to a 1.6% annual rate in the fourth quarter of 2005. The current behavior of the leading index still suggests that the sluggish growth in the fourth quarter should not persist, and economic growth is likely to pick up in the near term."
The decline, which follows four months of gains, suggested to some analysts that the nation's economic growth will slow in the second half of the year. Economists on Wall Street had expected the index to decline 0.3% in February, the Associated Press reports. "Essentially the story is we have got moderate growth through the first quarter. We may tick up in the second quarter and we may tick down in the third quarter," Ken Goldstein, economist at The Conference Board told The Associated Press. "Growth is going to be a little slower second half of the year." Editor's Note:
5. Wholesale Prices Plunge; Core Prices Rise The U.S. Labor Department today announced that producer prices – the prices that businesses pay for goods – fell 1.4% in February. That's the biggest drop since April 2003. However, excluding fluctuating food and energy prices, prices climbed 0.3%. In February, energy prices fell 4.7% - the biggest decline in 3 years; Food prices fell 2.7% - the biggest decline in 4 years. According to Marketwatch, "The main factor behind the falling wholesale prices was energy. Gasoline prices fell 11%, the most since April 2003, just after the invasion of Iraq. Natural gas prices fell 4.1%, the most since October 2001." Consumers may have noticed less pain at the pump in February relative to recent months; however, gasoline prices have already started to rise in March. According to AAA, gas prices have risen 25 cents in the past month for regular gasoline. "In the past year," says Marketwatch, "the PPI has risen 3.7%, compared with 5.7% last month. The core rate has accelerated to a 1.7% increase in the past 12 months, compared with 1.5% last month." Overall, prices are rising for wholesale goods. However, Economy.com points out that producers are having a difficult time passing on higher prices to consumers. "Sizable price gains continued among intermediate and crude producer goods, with relatively few of these increases being passed through to prices of finished products," reports Economy.com. "While core price appreciation among finished producer goods has remained tame, prices have risen over twice as quickly at earlier stages of processing during the past year. "Price increases among intermediate producer products, which are often considered a leading indicator for consumer price inflation, are particularly troubling. Prices for core intermediate goods have risen at least as quickly as have prices for core finished goods in each of the last eleven months," says Economy.com.
This echoes what MoneyNews reported concerning the NY Manufacturing survey last week. Manufacturers are having trouble passing on prices. This bottleneck in prices is going to become a gusher eventually. Producers can't continue to absorb costs – that would mean falling profits and angry shareholders . There are hidden inflationary pressures building in the pipeline … the government numbers just don't show them yet. Editor's Notes:
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