Krishna Guha

Why are people selling Goldman today? I’m not a trader and I would caution against taking any big positions based on policy that still lacks details. But it seems to me at first glance that Goldman and Morgan Stanley could end up benefiting in some ways from the Obama crackdown on the banks.

Goldman and Morgan can simply give up their bank charters and go back to being non-bank financial firms. Yes, they would still be subject to tougher prudential standards under the administration’s wider reg reform plan. Yes, they would lose access to central bank loans. 

Krishna Guha

As I’ve suggested in recent articles, next week’s FOMC meeting should be a non-event. The committee is relaxed about ending liquidity programmes on schedule on February 1 but wants to monitor the impact of phasing out MBS purchases by March 31 before doing anything else.

Most officials think the impact on mortgage rates will be small. But they do not know for sure. Given some renewed weakness in housing they will want to confirm that their expectations are correct before taking any more steps down the exit road.

The question of what to do with the discount rate will hover in the background, but a discount rate increase looks unlikely before March at the earliest. 

Krishna Guha

The new US bank levy will fall on uninsured debt – ie assets minus insured deposits minus equity. That makes a lot of sense.

Banks paid a premium to insure the insured deposits – these liabilities were always supposed to be insured against loss by the government via the FDIC. 

Krishna Guha

If I heard him right, Jamie Dimon, the head of JP Morgan, just told the Congressional inquiry into the financial crisis that in the pre-crisis years his firm never stress tested what might happen if there was a big fall in house prices. Remarkable.

Dimon is a tough risk manager and JPM came through the crisis in relatively good shape. Heaven knows what the others failed to consider.

Now everyone is stress-testing like crazy. But how long will this private sector discipline last? 

Krishna Guha

Boston Fed chief Eric Rosengren thinks mortgage rates will rise by 50 to 75 basis points in the spring as the Fed stops buying MBS.

That puts him on the high side of the internal Fed debate – various committee members see the likely impact in the 25 to 75 basis point range. 

Krishna Guha

A confession: I missed the Fed’s regulatory guidance to banks on interest rate risk yesterday. Some have misread this as a hint that rate increases are coming soon. I think that is the wrong take.

Bernanke and Kohn have talked about using regulatory tools rather than interest rates in the first instance to combat future bubbles and avoid the build-up of financial excesses. The latest guidance looks to me to be a very modest example of this -not a signal on rates. 

Krishna Guha

I wrote a piece in today’s paper flagging up the fact that the version of the Taylor rule cited by Bernanke in his AEA speech has recommended a positive interest rate since mid-2009. This raises the question of whether the Fed is still pinned to the zero bound (ie it would be running negative rates if it could) or whether a relatively modest upside forecast revision could lead to early rate hikes.

The calculation used by Bernanke – based on Fed forecasts over four quarters using PCE to measure inflation with equal coefficients for both sides of the dual mandate – suggests the Fed is not pinned to the zero bound any more and that the ideal interest rate is a fraction above zero. Which implies that a mid-sized forecast upgrade could start discussion of rate hikes.

However, my sense is that when it comes to policy Fed policymakers will a 

Krishna Guha

Today’s jobs report will be mildly disappointing for the Fed but not all that surprising. Policymakers were I believe expecting a negative number. The report is consistent with the idea that the labour market is turning – the three month moving average went down – but the improvement is sluggish and there may be several choppy months ahead.

It does however take some upside risk – of accelerating momentum leading to forecast upgrades – off the table. 

Krishna Guha

Very hawkish speech from Tom Hoenig today. He worries that staying too low for too long will generate financial stability risks and misallocation of resources as well as inflation risks.

In doing so he more or less explicitly rejects Bernanke’s weekend claim that keeping rates low after the dotcom bust had little or nothing to do with the housing and credit bubbles. 

Krishna Guha

Sharp-eyed observers are zeroing in on a chart (below) used by Ben Bernanke in his address to the American Economic Association at the weekend that appears to show the optimal interest rate based on a forward looking Taylor rule with a PCE measure of inflation was zero in early 2009 – and not a negative number.

This appears to conflict with earlier studies – including an internal Fed staff analysis I wrote about last year – that used modified Taylor rules to show that the optimal interest rate in early 2009 was well below zero – for instance, minus five per cent. Such analysis supported the case for large scale asset purchases as a proxy for negative rates.