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. Read more
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. Read more
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. Read more
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? Read more
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. Read more
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. Read more
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 Read more
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. Read more
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. Read more
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. Read more
Fed minutes show doves are still worried about the sustainability of the recovery. They fear renewed weakness in housing as the central bank winds down its MBS purchases and want to keep open the option of buying more MBS if a) the economic outlook deteriorates b) mortgage rates spike.
That option is still open, but I suspect it would take a big forecast downgrade and/or a large mortgage rate spike to persuade the majority of the committee to buy more MBS. Read more
A few quick first thoughts…
1) Fed staff getting more bullish on growth but still sees core and headline inflation declining over the next two years.
2) Policymakers think the outlook has “not changed appreciably” since the November meeting.
3) Doves (plural) still worry about sustainability of growth and want to keep open the option of expanding asset purchases.
4) Policymakers disagree as to how big an impact on mortgage rates the ending of MBS purchases will have.
5) They are not worried about current asset prices or the effect of the dollar decline to date on inflation but will keep a watchful eye on both going forward.
If the Fed is bothered about primary dealers lacking the balance sheet capacity to do reverse repos on a large scale, why not use its regulatory powers to ease these constraints? The Fed might want to do as much as $500bn in reverse repos. The dealers have balance sheet space for $100bn at most.
A short-term reverse repo with the central bank ought not to be the kind of asset a bank needs to set much capital aside for, nor the kind of asset that counts against crude leverage limits. I am not an expert on the regulatory side of this but I suspect the Fed might be able to do something about this if it put its mind to it. Read more
Another Republican swing vote that looked as if it was up for grabs has just gone against Bernanke – Kay Bailey Hutchison. Bernanke can rely on Republicans Bob Corker and Judd Gregg. But with David Vitter also saying he does not want to proceed before there is more information on AIG – and hardcore opponents Jim Bunning and Jim De Mint guaranteed No votes – that looks like at least half the Republican group on the commitee against by my calculations. Read more
OK so it’s not exactly Goldilocks. But maybe we are seeing a post-recession version of Goldilocks – call it Goldilite. The markets must be not too hot and not too cold, but just right.
The Fed marked up its assessment of growth yesterday but made no change to its assessment of inflation. In fact recent data suggest inflation risk has gone down not up: core inflation is flat, surveyed inflation expectations have edged lower and the dollar, commodities and gold have stabilised. Read more
The separation principle is back – this time on the US side of the Atlantic. With today’s statement the Fed is basically embracing an ECB-style distinction between liquidity policy and monetary policy.
At the onset of the crisis some Fed officials thought there was something to the separation principle idea. Others thought it was complete nonsense.
As the crisis intensified Fed officials quickly reached a consensus that it made no sense to distinguish between monetary and liquidity policy in crisis conditions when both directly and substantially influence private borrowing rates and overall financial conditions. They thought the ECB was mistaken Read more
For investors trying to estimate when the Fed will raise interest rates, today’s statement was a non-event. The Fed upgraded its assessment of economic conditions, but did not radically revise its view of the trajectory of growth going forward and left its discussion of inflation unchanged.
It underscored its intention to complete its exit from unconventional liquidity policy soon – but drew a bright ECB-style distinction between liquidity policy and monetary policy. It left for 2010 the question of whether the unusually narrow discount rate spread falls into the first category or the second.
Not much to get excited about.
But for analysts trying to understand the arc of Fed policy from crisis to a new normal it was a bit more interesting. Read more
The Federal Reserve on Wednesday upgraded its assessment of the economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010. But it gave no hint of inflation concerns that could lead to it raising interest rates.
The Fed also said that it was sticking to its existing plan to taper off and complete its scheduled $1,425bn purchases of securities issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, by March 31. Keep reading
I’ve just written a piece for tomorrow’s FT looking at five key exit strategy questions facing the Fed.
Just to be ultra clear to the best of my knowledge the Fed has only just begun strategizing on some of these issues and has not yet decided on a concrete plan. This underscores the fact that the Fed does not expect to be raising rates soon.
Here are the five questions: Read more
Might the Fed raise the discount rate at this week’s policy meeting? I think this is a possibility and should be considered as a risk factor. But I would not include a discount rate increase in my base case forecast for the meeting.
The Fed will I think seek to draw an increasingly sharp distinction between liquidity policy and monetary (interest rate) policy in the spirit of the ECB’s separation principle at this meeting and in subsequent communications. Read more