Cheap money or not, the Fed can't win

3:00 PM cheap, fed, money, win No Comments

| By Anthony Mirhaydari, MSN Money

Whether the Federal Reserve decides to ‘taper’ its money-printing on Sept. 18 or wait until later, the market will take a hit. It’s best to watch from the sidelines.

With the threat of an airstrike on Syria diminishing, investors are preoccupied by the next great market catalyst: The Federal Reserve's big announcement on Sept. 18.

Everyone wants to know whether or not Bernanke and company will pull back on the money printing -- tapering, to use the Wall Street term, the $85 billion-a-month bond-purchase program that started last September.

This stimulus program is the third round of quantitative easing we've seen since 2008. And like the end of the first two rounds, it's being treated like a life-or-death decision by the cheap-money junkies on Wall Street. Seriously. Life or death.

Yes, this stimulus helped us get through rough patches, including the European debt crisis, the so-called fiscal cliff debate in Washington at the end of last year and the sequester budget cutbacks. Those have given way to some very positive signs of economic reacceleration, especially in manufacturing.

But regular folks could be forgiven for wondering why the taper would have to happen now. Job growth has slowed, as the labor participation rates plummets. Housing has cooled, as interest rates have soared back to early 2011 levels on expectations of Fed tapering. Inflation is relatively benign right now. And we've got another budget battle brewing in Washington.

With expectations all over the map, the Fed has done a terrible job of managing sentiment heading into its announcement. That raises the risk of a negative market reaction that could rattle confidence and short-circuit the improvement we've seen. But efforts to ease the pain might set us up for big problems down the road.

Here's a look at the situation and what investors need to look out for.

The most immediate problem with all this right now -- setting aside the broader discussions of whether the Fed should be playing such a prominent role in the economy and the markets, as well as whether it kept monetary policy too loose for too long -- is that since Chairman Ben Bernanke first started dropping hints about a taper in May, the messaging has been muddled.

That's created a will-they-or-won't-they guessing game of financial uncertainty. Investors and traders have scoured every Fed policy statement and every set of meeting minutes released by the Fed since then, looking for any morsel of information that could clarify the outlook.

It hasn't helped that the economic data has been a little uneven, with strong purchasing manager reports (globally, not just here at home) but soft data on payrolls (labor participation down to 1978 levels as people leave the workforce) and new home sales (down to October 2012 levels).

The basic idea is that improving data will lead to tapering, while weak data will not -- which in a sense makes bad news good on Wall Street and good news bad.

And while, overall, Wall Street expects a taper of $10 billion next week and an outright end to stimulus next June, there is wide variation around the numbers and timing. For example, Bank of America Merrill Lynch analysts don't expect any action by the Fed next week, believing instead that action will wait until the Fed's October meeting, and maybe until December. Yet Societe Generale not only expects a September taper but believes QE3 will wrap up as early as March.

Anthony Mirhaydari

Credit Suisse has an interesting outlook, penciling in a $20 billion cut to the bond-buying program. That's double the consensus estimate, which they think is necessary given less Treasury bond issuance (due to smaller federal deficits) and fewer mortgage originations (as the refinancing boom ends). With less supply, the Fed's demand for these bonds risks distorting the Treasury and mortgage bond markets.

But they also don't believe the taper will be on cruise control. Instead, they're looking for Bernanke to emphasize at the post-announcement press conference that taper decisions are data-dependent and that the $20 billion taper might be the only one for a while -- diminishing expectations of additional cuts later this year.

Given the wide range of expected outcomes, many are sure to be taken by surprise. Most of all, regular working folks still struggling in this economy.

That's because while the unemployment rate recently fell to 7.3%, its lowest level since December 2008, the decline was driven by a 312,000-worker contraction in the labor force.

That left just 58.6% of the population officially in a job. The quality of new jobs continues to be low, as it has since the recession ended in 2009. UBS economist Maury Harris notes that recent job growth has been faster in low-wage positions than in high-wage ones on a scale not seen since 2010.

Overall, the economy added 169,000 jobs last month, bringing the six-month average monthly gain to just 160,000. Given that we're still 1.9 million jobs from the prerecession employment peak (and even more when we adjust for the growth in the population), it'll be a long climb back at the current rate.

Now, the numbers shouldn't be like this.

Read More

Fed concerned about stimulus side effects

4:00 AM about, concerned, effects, fed, stimulus No Comments

WASHINGTON -- Federal Reserve officials are increasingly concerned about the potential risks of the U.S. central bank's asset purchases on financial markets, but look set to continue its open-ended stimulus program for now.

Minutes from the Fed's December policy meeting showed a growing reticence about further increases in the central bank's $2.9 trillion balance sheet, which it expanded sharply in response to the financial crisis and recession of 2007-2009.

"Several (officials) thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet," the minutes said.

Wall Street picked up on the report's hawkish tone, with stock prices drifting lower after the announcement, while the dollar extended gains against the euro.

"The minutes of the Federal Reserve's December monetary policy meeting revealed a somewhat surprising level of concern among the ranks of central bankers regarding the long-term impact of the bank's asset purchase program, or quantitative easing," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

Still, the Fed appeared likely to continue buying assets for the foreseeable future, having announced in December it was extending monthly purchases of $40 billion in mortgage securities and also buying $45 billion in Treasuries each month.

A few of the voting members on the central bank's policy-setting Federal Open Market Committee thought asset buying would be warranted until about the end of 2013. A few others highlighted the need for further large-scale stimulus but did not specify an amount or time frame.

Fed officials generally agreed that the labor market outlook was not likely to improve without further nudging from the monetary authorities.

The U.S. economy expanded a respectable 3.1 percent in the third quarter on an annualized basis, but growth is believed to have slowed sharply to barely above 1 percent in the last three months of the year.

Data on Thursday showed a solid gain of 215,000 new private sector jobs for December, while analysts polled by Reuters last week were looking for a rise of 150,000 new jobs in the Labor Department's official survey, due out on Friday.

In the December meeting, the Fed also launched a new framework of policy thresholds, numerical guideposts that are supposed to give markets and the public a clearer idea of how policymakers will react to incoming economic data.

Officials say they will keep interest rates near zero until the unemployment rate falls to 6.5 percent for as long as estimates of medium-run inflation do not exceed 2.5 percent.

The minutes suggested it took officials some time to build a consensus around the idea.

"A few participants expressed a preference for using a qualitative description of the economic indicators influencing the Committee's thinking," the minutes said.

U.S. unemployment has come down steadily after hitting a peak of 10 percent in late 2009, but remains elevated at 7.7 percent.

Fed officials noted worries about the looming "fiscal cliff," which was dealt with only partly in an agreement earlier this week, were hurting the confidence of businesses and households.

Read More

Bernanke: With unemployment this bad, Fed can do more

9:30 AM Bernanke, fed, unemployment No Comments

Ted S. Warren / AP

Federal Reserve Chairman Ben Bernanke, left, and Stanley Fischer, governor of the Bank of Israel speak outside the symposium on Friday in Jackson Hole, Wyo.

By PAUL WISEMAN, Assocaited Press
JACKSON HOLE, Wyo. -- Chairman Ben Bernanke made clear Friday that the Federal Reserve will do more to boost the economy because of high U.S. unemployment and an economic recovery that remains "far from satisfactory."

He also argued that the Fed's moves so far to keep interest rates at record lows and encourage borrowing and spending have helped bolster the economy.

Bernanke stopped short of committing the Fed to any specific move, such as another round of bond purchases to lower long-term rates. But in a speech at an annual Fed conference in Jackson Hole, Wyo., Bernanke said that even with rates at super-lows, the Fed can do more.

After Bernanke's comments were released at 10 a.m. Eastern time, stocks initially gave up most of their earlier gains. But as investors digested the speech, stocks bounced back. By late morning, the Dow Jones industrial average was up more than 100 points. Broader stock indexes also surged.

Bernanke noted that further action carries risks but says the Fed can manage them. The Fed "should not rule out" new policies to improve the job market, he said.

The most dramatic step the Fed could take would be another round of bond buying. This is known as quantitative easing, or QE. In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — QE3— to be unveiled as soon as the Fed's next policy meeting in September.

In light of Bernanke's comments Friday, some analysts said that might be a stronger possibility now.

"Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid-September FOMC meeting," said Paul Dales, senior U.S. economist at Capital Economics.

At the same time, the Fed chairman avoided hinting of any one policy move or any timetable.

"This is really all he could say," says Steven Ricchiuto, chief economist at Mizuho Securities. "He is not at liberty to promise anything without the (policy) committee's approval, and there seems to be various opinions on the committee about the best way forward."

In his speech, Bernanke cited studies showing that the Fed's first two rounds of bond purchases created at least 2 million jobs.

"It is important to achieve further progress, particularly in the labor market," Bernanke said. "The Federal Reserve will provide additional policy accommodation as needed."

That remark echoed what the Fed had said in a statement after its most recent policy meeting, July 31-Aug. 1. Since then, somewhat stronger economic news had led some analysts to say the Fed might now feel less urgency to act. But Bernanke's reiteration Friday of the Fed's readiness to provide more help suggested that his economic outlook remains dim.

The U.S. economy is still struggling to grow. It expanded at a tepid 1.7 percent annual rate in the April-June quarter, the government estimated Wednesday.

The minutes of the Fed's July 31-Aug. 1 policy meeting showed that officials spoke with increased urgency about the need to provide more help for the U.S. economy.

The policy committee decided that action "would likely be warranted fairly soon" unless it saw evidence of "a substantial and sustainable strengthening" of the economy. After it meets in mid-September, the Fed's policy committee will meet once more, in late October, before the November elections.

QE3 isn't the Fed's only option. It already plans to keep short-term interest rates near zero through late 2014 unless the economy improves. It could settle for extending that pledge into 2015.

Mark Zandi, chief economist at Moody's Analytics, is among those who think the Fed will extend its timetable for record-low rates into 2015 at the September policy meeting. And unless the economy improves, Zandi expects the Fed to launch another round of bond purchases after the election.

Bernanke's comments Friday made clear that the economy has a long way back to full health.

"Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time," he said.

At the end of every August, economists and central bankers convene in the Rocky Mountains at a symposium organized by the Federal Reserve Bank of Kansas City. They present papers and argue about economic issues. But mostly, they wait to see what the Fed chairman has to say.

In August 2010, Bernanke hinted during his remarks at Jackson Hole that the Fed might begin a second round of bond purchases, a policy called quantitative easing, or QE2. The Fed started buying bonds three months later.

Many analysts think a third round of bond purchases — QE3 — would include both Treasurys and mortgage-backed securities.

Below, a CNBC panel discusses how markets may react to the speech and if Bernanke is laying the ground for more activism from the Fed.

Read More

Fed says economy grew slowly in July

12:30 PM economy, fed, July, slowly No Comments

WASHINGTON -- The U.S. economy continued to grow gradually in July and early August, but manufacturing activity was softening in many areas of the country, the Federal Reserve said on Wednesday.

In its Beige Book report of anecdotal information on business activity collected from contacts nationwide, the U.S. central bank said retail activity, including auto sales, had picked up since the last report.

"Reports from the twelve Federal Reserve districts suggest economic activity continued to expand gradually in July and early August across most regions and sectors," the Beige Book said.

The economic snapshot was prepared for use by Fed officials at their upcoming policy meeting on Sept. 12-13, when policymakers will debate whether further central bank bond purchases are warranted to spark a stronger recovery.

The economy grew at a 1.7 percent annual rate in the second quarter, supported by exports and investment in the construction of nonresidential structures. The pace was a slowdown from the 2.0 percent rate set in the first quarter.

The Beige Book captured the beginning of the third quarter and suggested the speed of the recovery was falling short of what was needed to spur faster hiring. "Most districts reported that employment was holding steady or growing only slightly," the Fed said.

It also noted that manufacturing was softening in many districts, matching findings from recent regional factory surveys. Much of the slowdown is blamed on weak demand overseas, especially in Asia.

"Many districts reported some softening in manufacturing, either a slowdown in the rate of growth or a decline in the level of sales, output or orders," the Fed said. "Across the districts, few manufacturing firms reported any major hiring or layoffs."

Copyright 2011 Thomson Reuters.

Read More

Fed struggles to spur slowest recovery in memory

9:52 PM Bernanke, fed, memory, Recovery No Comments

By John W. Schoen, Senior Producer
They’ve tried dumping $2 trillion in cash into the financial system, slashed overnight interest rates to zero and made an unprecedented promise to keep rates low for at least another two years.


But as Federal Reserve Chairman Ben Bernanke and his central bank colleagues meet this week to ponder their next move, they’re still struggling to quicken the pace of the slowest economic recovery in generations.


Until recently, it appeared the Fed’s medicine was finally having the desired impact. Economic growth, as measured by gross domestic product, picked up to a healthy 3 percent annual rate in the last three months of 2011. Manufacturing, driven by a healthy pickup in new car sales, shifted into higher gear over the winter. The unemployment rate, stuck at 9.1 percent last summer, fell by a half percentage point.


But that growth may have been something of an illusion.

“It looks like a lot of the hiring that we were so enthusiastic about late last year was weather-related," said Yale economist Stephen Roach. “A little bit of a bloom is off the rose."


That view was echoed by the responses of 53 economists, fund managers, and investment strategists in the latest CNBC Fed Survey, released Tuesday. Several lackluster economic reports have moved market participants closer to the Fed’s view on the economy and the outlook for monetary policy.


The respondents downgraded their outlook for year-over-year GDP growth to 2.39 percent from 2.46 percent. They took nearly a quarter point off the outlook for growth in 2013 and now see GDP rising just 2.55 percent. As a result, they downgraded already muted expectations for the stock market, predicting the S&P 500 stock index will be basically flat through June and rise just 2.9 percent by year-end.


“Bernanke has been vindicated on the Fed's forecast, with growth now giving back some of the seasonal strength we saw earlier in the year,’’ said Diane Swonk of Mesirow Financial.


The survey echoed the belief, shared by the Fed’s own forecast, that the economy will continue to turn in a subpar performance at least through the rest of the year. Asked their opinion of Fed policy, 51 percent of respondents say it’s “just right,” up from 38 percent in March; only 36 percent believe it’s “too accommodative,” down from 53 percent in March.


Some Fed officials, including Bernanke, have recently acknowledged that the economy isn't growing rapidly enough to make a significant dent in the unemployment rate.


“If our economy were a Kentucky thoroughbred, I'd say we have moved from a walk to a trot, but we're far from a gallop," Cleveland Fed President Sandra Pianalto told a meeting of bank regulators last week in Lexington, Ky.


There are signs that sleek horse may be slowing down into a walk.


After each recession since World War II, housing has helped lead the subsequent recovery. But five years into the biggest housing bust since the Great Depression, another hoped-for spring revival in home sales is in doubt.


Following signs earlier this year that the market may have hit bottom, the National Association of Realtors said last week that sales of previously owned homes fell 2.6 percent last month to a seasonally adjusted annual rate of 4.5 million. That's well below the pace of about 6 million typically seen in a healthy economy.


"We are most certainly not set to declare that the housing recovery is over, but a strong start to the spring selling season is simply not in the data," said Dan Greenhaus, chief global strategist at BTIG in New York.


Consumer spending and retail sales perked up in first quarter, but much of the increase was fueled by rising gasoline prices. Households have had to dip into savings to spend more.


The increased spending will be hard to sustain unless employers continue to create jobs faster than the workforce expands. Some economists, including Bernanke, suspect that the burst of new hires last winter was simply a reversal of some of the steep layoffs put in place after the economy’s sharp 2008 contraction. If so, the recent job market rebound may only be temporary.


“In a weak recovery, we're going to have a really hard time getting this unemployment rate down below 8 percent,” said Roach. “If you add in the underemployment, you've still got mid-teens in terms of broad-based measures of labor market distress in the United States, which is really without precedent for a so-called peacetime expansion."


Despite the Fed’s unprecedented measures, the current expansion badly lags other recoveries. More than four years after the recession of 2007 began, the U.S. economy has barely recovered the ground lost to the steepest downturn in 50 years. This far into past recoveries, by comparison, growth had advanced by anywhere between 10 and 20 percent.


As the U.S. economy slogs along, the global economy faces renewed pressures over which Fed policymakers have little or no control.


After a period of relative stability, Europe’s financial crisis appears ready to enter another turbulent chapter. In the past few weeks, fresh concerns about Spanish banks, political upheaval in Holland, and French president Nicolas Sarkozy's narrow loss in early round voting to his Socialist rival have cast doubts on a shaky set of European reforms pieced together to avert a wider crisis. With the exception of Germany, most of Europe has lapsed back into recession.


Growth in China, following a historic economic transformation, also appears to be slowing. Though still strong by Western standards, China’s slowdown represents a further slackening of demand for goods and services sold by U.S. and European companies.


The slowdown comes amid another historic shift in demand, as consumer spending in the developing world is becoming the key source for growth an increasingly global economy.


U.S. consumption as a percentage of world GDP peaked at about 22 percent in 2002, and has declined steadily since then, according to a recent report from economists at IHS Global Insight. Two years later, consumer spending in Western Europe peaked at almost 18 percent of the global economy. The economists predict that by 2015, consumers in those two regions will account for just 26.0 percent of world GDP, down from 38.5 percent in 2002.


Growth from consumers in emerging markets like Brazil, Russia, India and China, meanwhile, is accelerating, rising to 8.1 percent of world GDP in 2010 from about 4.4 percent from 1995 through 2005. IHS Global Insight predicts the figure will hit 12.0 percent by 2015.


The shift has been accelerated by the Great Recession, the Eurozone debt debacle, and anemic growth in Europe and the United States, they said. But it’s also being propelled by strong demographic and economic forces.


“Emerging markets' consumers are now entering the world stage in greater numbers and are making a noticeable impression on multinational corporations, which view consumers in these nations as the ‘low-hanging fruit’ compared to the fatigued and frugal consumers in the developed countries," the economists said.


The April headline from the CNBC Fed Survey shows the market doesn't expect much from the Fed, but believes in the late 2014 guidance on rates. CNBC's Steve Liesman provides the details.

Read More