Headlines (Scroll down for complete stories):
1. Greenspan: More Dollar Weakness Ahead
2. U.S. Trade Deficit with China Hits All-Time High
3. Fed Expected to Stall Again
4. Paulson: Mortgage Delinquencies a Rising Threat
1. Greenspan: More Dollar Weakness Ahead
The U.S. dollar will stay weak for the next few years, according to Former
Federal Reserve Chairman Alan Greenspan. Greenspan blames the U.S. balance of
payments deficit for the prolonged frailty of the dollar.
"I expect that the dollar will continue to drift downwards until there will be a
change in the U.S. balance of payments," remarked Greenspan, who spoke via
video-link to a business conference in Tel Aviv.
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"There has been some evidence that Organization of Petroleum Exporting Counties
(OPEC) nations are beginning to switch their reserves out of dollars and into
euro and yen," continued Greenspan.
MoneyNews told readers yesterday that the Bank for International Settlements,
which is known as the "central banks' central bank," reported a decline in U.S.
dollar reserves in OPEC countries as well as oil exporter Russia.
"It is imprudent to hold everything in one currency," advised Greenspan, who
sounded like he was talking down the dollar. In fact, Greenspan added that at
some point the dollar would decline in value.
"That (a falling dollar) will be the experience of the next few years,"
Greenspan said.
Editor's Note:
2. U.S. Trade Deficit with China Hits All-Time High
America's trade deficit fell to its lowest level in 14 months due to falling oil
prices in October, but the nation's trade deficit with China reached another
all-time high, the Commerce Department reports.
The U.S. trade deficit fell to $58.9 billion in October, an 8.4 percent decline
from the month earlier. That was the biggest percentage drop since December 2001
and the lowest level since August 2005.
A record drop in oil prices narrowed the trade deficit. The country's oil bill
plunged 17.1 percent to $21.8 billion. That was the lowest oil bill since July
2005. Falling oil prices translated fewer imports. Imports fell 2.7 percent to
$182.5 billion.
Record exports from the U.S. also helped narrow the gap. Exports of goods and
services, such as farm products, computers, and airplane parts, rose 0.2 percent
to a record $123.6 billion in October.
Overall, though, the trade deficit is running at an annual rate of $772.1
billion. That would be the fifth year in a row of a record imbalance.
U.S. imports of toys, televisions, and computers from China pushed the U.S.
deficit with its trading partner to a new record. The U.S. deficit with China
rose 6.1 percent to $24.4 billion in October. That's the third month in a row of
record-setting deficits with China. Annualized, that brings the deficit with
China to $229 billion, on pace to set a new record for the year.
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3. Fed Expected to Stall Again
U.S. Federal Reserve policy-makers started a meeting Tuesday at which they are
expected to hold official interest rates steady and retain a cautionary warning
about inflation risks.
A decision by the Fed to keep benchmark borrowing costs at 5.25 percent would
extend an interest-rate pause that officials initiated when they stepped to the
sidelines on Aug. 8 after a two-year string of 17 consecutive rate increases.
Holding steady would be in keeping with the view, expressed by Federal Reserve
Chairman Ben Bernanke and colleagues, that higher-than-desired core inflation is
a worry, but price pressures should ease as slower growth pushes up
unemployment.
Core inflation strips out volatile food and energy costs.
The Fed's policy-making Federal Open Market Committee is expected to announce
its decision around 2:15 p.m.
"We don't expect to see any interim step to more balanced risks, so that Mr.
Bernanke and Co. can muster as much inflation-fighting credibility as possible
and avoid any premature stimulus provided by a fixed income rally that would
surely follow the shift away from a tightening bias," BMO Capital Markets
analyst Michael Gregory wrote in a research note.
Bernanke called core inflation "uncomfortably high" in a speech on Nov. 28,
adding there were risks prices would not recede in spite of the drags on growth
from slowing housing markets and weakness at auto plants and other factories.
Fed Vice Chairman Donald Kohn renewed the warning on inflation this month,
saying that while policy-makers expect inflation to ease, "the risks around that
expectation are tilted to the upside," suggesting the Fed sees a greater chance
of interest rates rising than falling.
Kohn pointed to tight labor markets and an economy that, while growing more
slowly than at the beginning of the year, is expanding at a pace not that far
below the speed limit for keeping inflation under control.
U.S. output grew at a 2.2 percent annual rate in the third quarter, slowing from
2.6 percent in the second quarter and 5.6 percent in the first three months of
the year. Many economists see the U.S. long-term trend growth rate at around 3
percent.
Core U.S. inflation rose 2.4 percent over the year through October, according to
the Fed's favorite measure, off slightly from the more than 11-year high of 2.5
percent in August.
Many Fed officials have said their comfort zone for core inflation is between 1
and 2 percent.
The Fed's focus on inflation comes amid signs of a slowing economy that have
many analysts expecting the U.S. central bank will change course sometime in
2007 and seek to ward off economic weakness by lowering interest rates.
A gauge of factory activity from the Institute for Supply Management dropped
below the break-even point between expansion and contraction for the first time
in 3-1/2 years in November.
In addition, the government reported that home prices edged up at a modest
annual rate of 3.45 percent in the third quarter from the second quarter, the
slowest quarterly rise since the second quarter of 1998.
A slowdown in housing is expected to dampen consumer spending. Wal-Mart, the
world's largest retailer, said sales at its U.S. stores open at least a year
fell 0.1 percent from November 2005, the first decline since April 1996.
"The combination of slower growth and reduced inflation risks, if it occurs,
will thus allow the Fed to stay on hold for much of 2007, and to ease gradually
as inflation moves lower late next year and into 2008," Morgan Stanley Chief
U.S. Economist Richard Berner said in a research note on Monday.
In a sign that may have given comfort to the Fed, the unemployment rate edged up
to 4.5 percent in November from the 5-1/2-year low of 4.4 percent reached in
October. The Fed has been concerned that tightness in the jobs market could lead
to wage gains that would put further upward pressure on prices.
© 2006 Reuters
Editor's Note:
4. Paulson: Mortgage Delinquencies a Rising Threat
Mortgage delinquency and foreclosure rates are on the rise, and the impact could
be greatest on low-income families that took out higher-interest loans for risky
borrowers, some experts said Monday.
Treasury Secretary Henry Paulson said the government wants to issue guidelines
to banks and savings and loans that will allow people to get home loans "without
taking unnecessary risks."
"Expanding opportunities for more people to buy a home is a good thing. But we
do not want Americans to become overextended and see their dream end in
foreclosure," Paulson said at a conference on the housing market organized by
the Office of Thrift Supervision, a Treasury Department agency.
Some experts are concerned that the increase in mortgage foreclosure rates could
affect the banking system's financial health.
There have started to be "early signs of credit distress" in financial
institutions' holdings of so-called "sub prime" mortgages, especially in
California, Richard Brown, chief economist for the Federal Deposit Insurance
Corp., said at the conference.
In the sizzling housing boom that waned in the latter half of last year, many
people took out sub prime mortgages — higher-interest loans for people with
blemished credit records who are considered higher risks — with adjustable
interest rates.
When interest rates rise, as happened last spring, it can raise monthly payments
for people with adjustable-rate mortgages, potentially creating a strain if they
stretched to buy a home and don't have a financial cushion in their savings.
William Longbrake, a senior policy adviser to the Financial Services Roundtable,
an industry group, said he is among a minority of experts "who believe the worst
is still ahead in the housing market" for home prices to continue to fall.
"There is worse to come . . .The bottom is probably still many months ahead,"
Longbrake said. He noted that the rise in delinquencies and foreclosures in sub
prime mortgages particularly affects low-income families.
Mortgage defaults could snowball in the coming months, a situation that bears
close watching, he said.
The Mortgage Bankers Association reported in September that mortgage
foreclosures climbed in the second quarter as higher interest rates and energy
prices made monthly payments harder for some homeowners.
The percentage of mortgages that went into the first stages of the foreclosure
process in the April-to-June quarter rose to 0.43 percent, up from 0.41 percent
in the first quarter and the highest level in just over a year. Foreclosure
rates were highest for sub prime borrowers.
Also in September, the federal banking regulators directed financial
institutions to properly explain the risks posed to borrowers from interest-only
and other nontraditional mortgages. Such mortgages have exploded in popularity
in recent years and raised concern that there could be a sizable number of
defaults if borrowers cannot meet rising mortgage payments.
The regulators also said banks must make sure the loans they made were
"consistent with prudent lending practices, including consideration of a
borrower's repayment capacity."
Paulson said Monday the Treasury Department wants to "make sure that we have the
right guidance in place to help people access home financing without taking
unnecessary risks."
© 2006 Associated Press
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