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Wednesday February 1, 2012

Fed Outgunning ECB Blunts Currency as Trade Weapon: Euro Credit

By David Goodman

Feb. 1 (Bloomberg) -- European Central Bank President MarioDraghi has pumped less stimulus into the economy he oversees
than his Federal Reserve counterpart Ben S. Bernanke, bolstering
the euro at levels that won't revive growth by boosting exports.
Europe's single currency has strengthened 5 percent against
the dollar since reaching a 17-month low on Jan. 13, cutting the
euro's decline to about 4 percent since Draghi took control of
the ECB on Nov. 1. He has cut interest rates twice and lent
unlimited three-year funds to banks. Bernanke on Jan. 25 pledged
to keep the U.S. benchmark rate near zero through late 2014, and
signaled a possible third round of asset purchases.
The euro was overvalued by an average of 16 percent against
the dollar during the tenure of Jean-Claude Trichet, Draghi's
predecessor, according to a measure of purchasing power parity.
ECB research shows a 10 percent drop in the trade-weighted value
of the common currency adds 0.7 percent to growth in the first
year and 1.2 percent in the second. The euro trades at about
$1.3072, down from a six-month average of $1.3884.
"Draghi probably has more of a view that a weak euro is a
good thing than Trichet," said Marchel Alexandrovich, an
economist at Jefferies International Ltd. in London. "Europe
needs lower rates, and they should just go ahead and cut them.
The Fed is being more transparent, and committing to policy for longer."

Highest Rates
Even after two cuts, the ECB's 1 percent benchmark lending
rate is the highest among the world's four major currencies.
The Bank of England has kept its main interest rate at a
record low 0.5 percent since March 2009, and increased its
asset-buying target to 275 billion pounds ($434 billion) on Oct.
6. The Bank of Japan's key rate is at 0.1 percent and it has
sold the yen to curb its appreciation as recently as October.
The Swiss National Bank imposed a currency floor of 1.20 francs
per euro on Sept, 6 to prevent its currency from strengthening
past that level. The SNB's target rate is zero, while the Fed's
rate is between zero and 0.25 percent.
"Weakening the euro could be supportive for the economy,
but I think to do that the ECB will have to cut rates at the
next meeting," said Alessandro Giansanti, a senior rates
strategist at ING Groep NV in Amsterdam. "The countries which
will have a direct benefit are the ones with export-driven
economies such as Germany, the Netherlands, Finland and Austria.
A lower euro will also boost Greece, Portugal and Spain, whichare used to running huge current-account deficits."

Growth Outlook
European Union leaders meeting in Brussels this week agreed
to a fiscal-discipline treaty that speeds sanctions on high-
deficit states, moving attention to how those countries can grow
fast enough to lower their debt loads. The euro-area economy
will shrink 0.5 percent this year after expanding 1.5 percent in
2011, according the median estimate of 19 economists in a
Bloomberg survey. The U.S. economy will grow 2.3 percent in
2012, following 1.8 percent growth last year.
While Bernanke is considering a third round of asset buying
known as quantitative easing, the ECB sterilizes its bond
purchases by selling an equal amount of seven-day securities
each week. Draghi injected 489 billion euros into the euro-
region economy in the form of three-year loans to banks on Dec.
21, a move that has bolstered the euro, according to David
Bloom, global head of currency strategy at HSBC Holdings Plc.
"When the Fed does QE it circumvents the banking system
and floods the market with money," he told Sara Eisen on
Bloomberg Television's "Inside Track." "When the ECB does QE,
it does it through the banking system, who don't really want to
let it out. When the ECB does it, it means the euro is not
breaking up. Once the break-up risk goes away the euro actuallygoes up."

Yield Relief
Yields on Spanish and Italian bonds have dropped since the
ECB offered its first tranche of bank loans. Spain's 10-year
borrowing cost is about 4.98 percent, after peaking at 6.78
percent in November. Italian 10-year yields are 5.96 percent,
down from 7.48 percent in November.
The euro is 14 percent overvalued against the dollar,
according to a Bloomberg measure of purchasing-power parity that
compares consumer prices across countries to ascertain fair
value. It reached 23 percent overvalued in April 2011 and was
last at equilibrium in 2003, according to the measure.
The dollar has dropped 1.1 percent since the Fed's most
recent meeting on Jan. 25, according to Bloomberg Correlation-
Weighted Indexes, which track 10 developed-nation currencies.
Societe Generale SA recommended selling the dollar against
the euro and the pound that day on the prospects for more
quantitative easing. The Fed has already purchased $2.3 trillion
of debt in two rounds.
"The race to the bottom is on, as Ben fights back against
Mario's attempt to take over the mantle of 'Big Easy,'" Kit
Juckes, Societe Generale's London-based head of foreign-exchange
research, wrote in a note. "This is stilldebasement/devaluation," he said of the dollar.

 

Monday January 30, 2012

U.S. 5-Year Yield Drops to Record on Speculation Fed to Buy Debt
By Wes Goodman

Jan. 30 (Bloomberg) -- Treasury five-year yields extended
declines to a record low on speculation the Federal Reserve is
preparing to increase its debt purchases to spur the economy.
The difference between 5- and 30-year yields widened to
2.37 percentage points last week, the most since September, as
analysts said notes would benefit most while the risk of
inflation hurts longer-term securities. The central bank bought
$2.3 trillion of debt in two rounds of quantitative easing known
as QE1 and QE2 that ended in June. Fed Chairman Ben S. Bernanke
said last week that he is considering additional purchases.
"The Fed may announce as soon as its next meeting in March
that it will start QE3," said Hiroki Shimazu, an economist in
Tokyo at SMBC Nikko Securities Inc., a unit of Japan's third-
largest publicly traded bank by assets. "I recommend buying
short-term Treasuries maturing in five years and less. There is
a risk of inflation in the longer end."
Benchmark 10-year yields dropped two basis points to 1.87
percent as of 11:23 a.m. in Tokyo, according to Bloomberg Bond
Trader prices. The 2 percent security maturing in November 2021
changed hands at 101 4/32. Five-year notes yielded 0.7390
percent after falling to a record 0.7331 percent.
Fed officials also announced last week that they will keep
their benchmark interest rate low until at least late 2014.
The central bank is replacing $400 billion of shorter-
maturity Treasuries in its holdings with longer-term debt to cap
borrowing costs under a plan it announced in September. It is
scheduled to buy as much as $5 billion of securities due from
February 2020 to November 2021 today, according to the New York
Fed's website.

Inflation-Linked Debt

Bonds that protect against inflation are turning into the
hottest part of the $9.94 trillion market for U.S. Treasuries.
A $15 billion auction of Treasury Inflation-Protected
Securities this month drew the strongest demand since March even
though yields on the notes average less than zero percent for
the first time, according to Bank of America Merrill Lynch
indexes. Yields on all types of Treasuries are at or near record
lows and, except for the 30-year bond, provide negative real
returns after taking into account the consumer price index.
Investors are seeking the safety of U.S. debt as analysts
cut their growth forecasts and Europe's fiscal crisis deepens,
helping the government borrow record sums to support the economy
almost five years after the subprime mortgage meltdown led to
worst financial disaster since the Great Depression.
TIPS have returned 111.3 percent the past decade, beating
the 73.4 percent for Treasuries not indexed to inflation. The
Standard & Poor's 500 Index has gained about 33 percent,
including dividends.
"Even with real rates being negative investors view TIPS
as the optimal place to put your money if you do have to buy
U.S. bonds because it is still government paper while also
protecting you from long-term inflation," George Goncalves, the
head of interest-rate strategy in New York at Nomura Holdings
Inc., said in a Jan. 27 interview. The firm is one of 21 primary
dealers of U.S. government securities that trade with the Fed.

 

Friday January 27, 2012

Harvard's Feldstein Sees Slow Growth While Doubting

By Bob Willis and Sara Eisen

Jan. 27 (Bloomberg) -- U.S. economic growth may not top 2

percent this year and a third round of quantitative easing by

the Federal Reserve would have little effect, said Martin

Feldstein, a professor of economics at Harvard University.

"We're going to have a hard time reaching 2 percent this

coming year," he said in an interview on Bloomberg Television's

"InsideTrack" with Sara Eisen in New York. The economy is

still in a "danger zone," Feldstein said, even as the

recession risk "is less now than it was."

The economy grew at a less-than-forecast 2.8 percent pace

in the fourth quarter, with consumer spending at 2 percent, the

government reported today. Inventory accumulation accounted for

1.9 percentage points of the total growth rate, setting the

stage for fewer orders to factories in the first half of the

year.

Feldstein, a member of the committee that dates recessions,

said any move by the Fed to conduct a third round of

quantitative easing, known as QE3, is "not the solution." The

economy wouldn't "get much help from more monetary stimulus,"

he said.

Federal Reserve policy makers this week pledged to keep

their key lending rate near zero until "at least" late 2014,

moving the target further back more than a year. Fed Chairman

Ben S. Bernanke hinted the central bank would consider

conducting QE3 through large-scale asset purchases, saying it

was prepared for further "accommodation."

Feldstein, speaking before the GDP report was released,

said last year's growth in household spending was largely due to

consumers drawing down their savings, which he said they won't

be able to maintain this year.

Consumer Spending

"The thing that made that increase in consumer spending

possible was people cut their savings rate" he said. "It's

hard to believe it's going to happen again" at the same pace.

For the full year 2011, the economy expanded 1.7 percent

and consumer spending grew 2.2 percent, according to Commerce

Department data. The personal savings rate fell to 3.5 percent

in November from 5.8 percent in June 2010, the department said.

"The question is, what, if anything, is going to sustain

real GDP growth in 2012," said Feldstein.

Feldstein said the second round of quantitative easing

provided a temporary boost to stock prices, consumer spending

and economic growth in 2010. Then, as the effect faded, the

economy "fell flat on its face in the first quarter of 2011,"

he said, when growth was 0.4 percent.

'A Joke'

Feldstein said it was a "joke" to term as "voluntary"

any agreement with the Greek government over lowering its debt

principal and payments to avoid triggering credit default swaps.

"To call that voluntary just so they can avoid triggering

the credit default swaps is really dishonest," he said.

"People bought credit default swaps thinking that was a real

market, it was real insurance."

Officials, including former European Central Bank President

Jean-Claude Trichet, have insisted that a swaps trigger was

unacceptable because traders would be encouraged to bet against

indebted nations and worsen the crisis.

Feldstein is a former president of the National Bureau of

Economic Research and a member of the NBER committee that

declared the recession ended in June 2009. He formerly served as

chief economic adviser to President Ronald Reagan.

 

Fed's Lacker Says Economy May Warrant Earlier Rate Increase (1)

(Updates with Lacker comment in seventh paragraph.)

By Joshua Zumbrun

Jan. 27 (Bloomberg) -- Federal Reserve Bank of Richmond

President Jeffrey Lacker said interest rates may need to rise

before late 2014 to prevent an increase in inflation.

"I do not believe economic conditions are likely to

warrant an exceptionally low federal funds rate for so long,"

Lacker said in a statement on the Richmond Fed's website

explaining his dissent from the central bank's Jan. 25 decision

to pledge keeping its benchmark interest rate near zero "at

least through late 2014."

"I expect that as economic expansion continues, even if

only at a moderate pace, the federal funds rate will need to

rise in order to prevent the emergence of inflationary

pressures," he said.

Fed Chairman Ben S. Bernanke has been unable to forge

unanimity on the Federal Open Market Committee since June, as

decisions have drawn objection from five policy makers both in

favor and opposed to further stimulus.

Lacker this week objected to the Fed's decision to extend

its previous pledge to keep borrowing costs low at least until

the middle of 2013. The Fed pushed the rate close to zero in

December 2008 and has since engaged in two rounds of asset

purchases totaling $2.3 trillion to boost the economy and reduce

the jobless rate, which stood at 8.5 percent in December.

"The Committee expects to maintain a highly accommodative

stance for monetary policy," the FOMC said in its statement.

"Economic conditions -- including low rates of resource

utilization and a subdued outlook for inflation over the medium

run -- are likely to warrant exceptionally low levels for the

federal funds rate at least through late 2014."

Other Objections

Lacker said he also objected to including a time period for

the first interest rate increase in the FOMC's statement, and

said such information could better be provided in the central

bank's Summary of Economic Projections.

After the two-day meetings at which policy makers update

their forecasts, a statement is released at around 12:30 p.m. A

table and charts showing policy makers forecasts for inflation,

gross domestic product, the unemployment rate and the Fed's

target rate are released at 2 p.m. The complete forecasts and

explanatory text are published after a three-week lag, along

with the minutes of the meeting.

"My dissent also reflected the view that statements about

the future path of interest rates are inherently forecasts and

are therefore better addressed in the SEP than in the

Committee's policy statement," said Lacker, who became a voting

member of the FOMC this month as part of a rotation among the

Fed's 12 regional presidents.

'On the Table'

Bernanke, speaking at a news conference after the

statements, said that the option of further large-scale bond

purchases is still "on the table."

"If the situation continues with inflation below target

and unemployment declining at a rate which is very, very slow,

then the logic of our framework says we should be looking for

ways to do more," Bernanke said.

At Fed meetings in November and December, Chicago Fed

President Charles Evans dissented, favoring further

accommodation to boost the economy. In August and September,

Philadelphia's Charles Plosser, Richard Fisher of Dallas and

Narayana Kocherlakota of Minneapolis opposed decisions to add

monetary stimulus.

Lacker, 56, became president of the Richmond Fed in 2004

after five years as director of the regional bank's research

department. He has dissented from six previous decisions of the

FOMC, most recently when he opposed its decision in November to

arrange currency-swaps with other central banks and to lower the

pricing on temporary U.S. dollar swap arrangements by 0.5

percentage point.

Lacker said the program "amounts to fiscal policy, which I

believe is the responsibility of the U.S. Treasury."

 

Wednesday January 25, 2011

Ron Insana on Facebook Today

The Fed's decision to extend the term of low interest rates is EXTREMELY important. It is a "buy signal" for stocks and shows its commitment to ensuring a sustainable economic recovery. The Fed may still do more. "Do not fight the Fed" is a mantra that still holds true. Regardless of what the "hard money" crowd says, this is exactly the right policy given the pervasive deflationary forces at work around the world. This is not going to lead to hyperinflation, the Fed is insulating the US economy from importing deflation. It is an extremely important distinction!!

 

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