Posts Tagged ‘fed rate’

Steady Rates Until 2012 Pushes Markets Up

Tuesday, June 15th, 2010

Given high unemployment and low inflation, the Federal Reserve is likely to wait until 2012 before it starts to raise interest rates, a new Fed research paper states. The paper, released Monday by the Federal Reserve Bank of San Francisco, does not represent the official position of the central bank, whose governors have declined to specify when they might begin to raise rates. The benchmark short-term interest rate, known as the federal funds rate, has been essentially zero since December 2008, and most economists estimate that the Fed will increase it earlier than 2012.

We’re heading towards a collision course with  eventual Inflation down the road.

Glenn D. Rudebusch, a senior vice president and associate director of research at the San Francisco Fed, is notable for its plainspoken conclusion. Mr. Rudebusch concluded from Fed decisions over the last two decades that there was a statistical relationship between core consumer price inflation and the gap between actual unemployment and the natural, or normal, rate of unemployment.

Given that relationship, as the recession worsened and inflation slowed in 2009, the Fed in theory should have lowered the federal funds rate by another 5 percent, Mr. Rudebusch wrote. In reality, since the Fed had already hit what it calls the “zero lower bound,” this was impossible; the central bank left its target range for the fed funds rate at zero to 0.25 percent.

“To deliver future monetary stimulus consistent with the past— and ignoring the zero lower bound — the funds rate would be negative until late 2012,” Mr. Rudebusch wrote. “In practice, this suggests little need to raise the funds rate target above its zero lower bound anytime soon.”

If the rate were raised too soon, it would be hard to reverse course, whereas if tightening is started too late, the Fed could catch up by raising rates at a rapid pace and then accelerate inflation.

Changes in long-term interest rates have much larger effects on the economy than equal-sized changes in short-term interest rates. Assuming that the Fed holds onto the roughly $2 trillion in mortgage-backed securities and Treasury debt on its books, the Fed would not need to start raising rates until the beginning of 2012.

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S&P at 17 Month High

Tuesday, March 16th, 2010

After a shaky start, stocks ended the session with respectable gains! The driving factor of the FOMC drove the bears to cover their shorts. The Federal Open Market Committee (FOMC) took the spotlight today, and the central bankers shocked absolutely no one by voting to maintain interest rates at their current, rock-bottom levels.The U.S. Federal Reserve renewed its pledge on Tuesday to keep interest rates near zero for an “extended period” even as it sounded more upbeat about jobs. 

While the Fed was widely expected to keep its target rate for overnight loans between zero and 0.25%, analysts combed the central bank’s accompanying policy statement for clues as to the timing of future rate-hike moves. Still, it repeated its view that the economy’s recovery would likely be moderate for a time and that inflation was likely to remain subdued as it held interbank overnight rates in a zero to 0.25 percent range. 

“The (Fed’s policy) committee … continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the central bank said in a statement.

For a second consecutive meeting, Kansas City Federal Reserve Bank President Thomas Hoenig dissented, saying the term “to keep rates exceptionally low for an extended period” was no longer warranted. 

The central bank also said business spending on equipment and software had risen “significantly,” also a brighter assessment than the one it gave in January.

The central bank reiterated that it intends to wrap up purchases of mortgage-related assets by the end of March, but said it would monitor the economic outlook and financial developments to see if more support is necessary. The consequence, higher mortgage rates if the private market does not fill in the government’s role of purchasing the mortgage-related assets.

Also fueling gains for commodities, S&P affirmed Greece’s sovereign ratings, sparking a rally in the euro and putting further pressure on the dollar. The dollar’s slide against the euro and other major currencies boosted commodities including gold and oil, making them less costly to foreign buyers.

Gold for April delivery finished up $17.10, or 1.5%, at $1,122.50 an ounce. The SPDR Gold Trust GLD 110.35, the largest exchange-traded fund backed by gold, rose 1.6%. Data showed holdings in the fund drop rose by 343.53 tons in the week ended March 6.

Other metals also gained. May silver futures rose 24.2 cents, or 1.4%, to $17.35 an ounce. Copper for May rose 6.5 cents, or 1.9%, to $3.37 a pound.

Palladium for June delivery was up $11.75, or 2.6%, at $472.40 an ounce and platinum for April gained $14.90, or 0.9%, to $1,630.70 an ounce.

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Bernanke to the Rescue – the Market Savior!!

Wednesday, February 24th, 2010

All eyes were on Federal Reserve Chairman Ben Bernanke today, as the central banker began a two-day venture on Capitol Hill. Issuing his semi-annual assessment of the economy, the Fed chief didn’t disappoint, assuring Congress that last week’s move to boost the rate on emergency loans to banks doesn’t necessarily indicate more rate hikes in the near future. As a result, the Street let out a collective sigh of relief, sending stocks soaring in late-morning activity. Though the government’s report that new-home sales unexpectedly fell to a record low in January helped to limit the bulls, the major market indexes settled in the positive territory nonetheless, halting a two-day downturn. The Dow finished in the black for a 91 point gain.

The Federal Reserve chairman’s poise during his testimony on Capitol Hill seems to have counterbalanced a gloom fest on Wall Street. I must praise the Fed chief’s insistence that interest rates will be kept low in order to stimulate the economy. That in turn should create much-needed jobs.

Excerpts from the meeting this morning:

“The country has lost 8.4 million jobs in a little more than two years in the most severe economic downturn since the Great Depression. Job losses were abating, but also acknowledged the recession’s toll on American workers. Notwithstanding the positive signs, the job market remains quite weak, Bernanke told the House Financial Services Committee. The U.S. central bank’s policy-setting Federal Open Market Committee was prepared to support the economy with extraordinary stimulus for some time. The FOMC continues to anticipate that economic conditions—including low rates of resource utilization, subdued inflation trends, and stable inflation expectations—are likely to warrant exceptionally low levels of the federal funds rate for an extended period, echoing the Fed’s most recent policy statement in late January. Under current projections, we have a deficit and a debt that will continue to grow. We do not believe the U.S. credit rating would be downgraded. However, that the time would come for tighter policy and he argued the Fed possesses a broad array of tools to remove such accommodation when the time is right. Among the Fed’s options, are reserve-draining transactions with financial institutions. One such program, a “term deposit facility” that would give banks the incentive to park their money at the central bank”

As this meeting progressed, another headline ignited the bull run stating “Senate approves $15 Billion Job Package“ It includes tax breaks and highway spending that aims to bring down the country’s stubbornly high unemployment rate. By a vote of 70 to 28, the Senate approved the bill and sent it on to the House, which could approve the measure quickly for President Barack Obama to sign into law. The legislation includes a $13 billion payroll tax break for businesses that hire unemployed workers, along with subsidies for state and local construction bonds. The bill would also extend highway and mass transit programs through the end of the year and pump $20 billion into them in time for the construction season. Economists say the tax breaks could create perhaps 250,000 jobs. The bill’s costs are offset by a crackdown on offshore tax shelters. It also included 13 Republicans in favor of the Bill. The Jobs Bill to some believe that money should have been used to pay the deficit.

I still believe the market still has a lot sifting to do especially when earnings top out and consumers continue to tighten their belts. Consumers is what drove the economy the last 40 years. It’s not like we’re manufacturing or producing  anything here in the States anymore.

Other news:My morning announcement of COIN did not pan out as I had hoped and may have been a bit premature ahead of Converted Organics Inc. announcement of voluntarily removing its Unit Ticker COINU off of the NASDAQ (not our COIN ticker). Story can be found here We do apologize but strongly believe it certainly won’t retest the all time low. If we fall below the .85 level all bets are off. I hope you can stomach the volatility as I mentioned that this a risky play with a huge reward. Just an FYI the de-listing notice is common as SIRI is too on the list when the share price is below a $1.00 per share. It must remain above a $1.00 for an extended period to meet SEC’s requirement. Tomorrow looks on course for extending to the downside. Remember to place your stop loss at .85. In the mean time sit tight. It may take a few weeks to pop while they transfer COINU (Unit shares) to the common share COIN.

DDR (10.38) continues to show tremendous support and is on track of breaking the 52 week high of 10.66 very soon!!! FYI March $10 call strike now at .65

ACE

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