Fed Officials Said Low Rates May Fuel Speculation (Update3)

By Craig Torres
Nov. 24 (Bloomberg) -- Federal Reserve officials said record-low interest rates might fuel "excessive" speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today.
"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period," minutes of the Nov. 3-4 meeting said, "including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations."
While policy makers agreed that the chances of such effects were "relatively low, they would remain alert to these risks,"
the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero "for an extended period" as long as inflation expectations are stable and unemployment fails to decline.
Gold prices touched an all-time high of $1,174 an ounce in New York yesterday as a slumping dollar boosted the appeal of alternative assets. The Standard & Poor’s 500 index has jumped
63 percent since its 2009 low on March 9, and the U.S. auctioned
$44 billion of two-year debt yesterday at a yield of 0.802 percent, the lowest ever.
"They are walking the fine line," said Alan Levenson, chief economist at T. Rowe Price Group Inc., in a Bloomberg Television interview. "They like the asset inflation now for what it does for consumers’ pocket books and ability to spend."
They need to prevent higher spending from fueling a rise in prices, he said.

Speculative Capital

Financial officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.
"Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year," the minutes said. "Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching."
The dollar weakened to the lowest level versus the yen in a month after the minutes were released. The dollar fell 0.5 percent to 88.56 yen at 3:21 p.m. in New York from 88.97 yesterday, after touching 88.36, the lowest level since Oct. 9.

Less Than Estimated

A report today showed the U.S. economy grew less than initially estimated last quarter as consumer spending trailed forecasts. The economy expanded at a 2.8 percent annual rate in the third quarter, less than the initial estimate of a 3.5 percent pace of expansion, the Commerce Department report showed.
"Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives," the minutes said.
Policy makers debated the usefulness of selling assets as part of the so-called exit strategy from the unprecedented expansion of credit to help reduce the central bank’s balance sheet and reserves held by commercial banks.
Several officials said asset sales "could be a useful tool" and "reinforce the effectiveness" of paying interest on reserves held at the Fed by commercial banks. Other policy makers "had reservations about asset sales," especially before any decision to raise interest rates, and said such sales may increase longer-term rates, the minutes said.

Trimmed Forecasts

Fed officials trimmed their forecasts for the U.S. jobless rate in 2010 and 2011, the minutes showed. Fed governors and regional bank presidents predicted the jobless rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from their June projection of 9.5 percent to 9.8 percent.
The financial crisis has eased in recent months for banks and large corporations, which have issued a record $1.171 trillion in bonds this year, according to Bloomberg data. The cost of three month loans in dollars between banks was 0.261 percent today, according to the British Bankers Association.
That’s down from 1.41 percent at the start of the year.
While large companies are taking advantage of the Fed’s low interest-rate policy in capital markets, consumers face tighter terms and less available credit. Consumer loans held by commercial banks in the U.S. fell to $846.7 billion in October, down 0.7 percent from the same month a year earlier.

‘Tight Conditions’

"Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms," the minutes said.
The Fed’s mandate for "maximum employment" remains challenged as businesses continue to reorganize and fire staff.
The U.S. economy has lost 7.3 million jobs since the recession began in December 2007. The unemployment rate last month rose to a 26-year high of 10.2 percent. U.S. payrolls shrank by 190,000 jobs last month, and the average workweek held at a record low.

More economic news...


Data confirm strength of US housing recovery

By Alan Rappeport in New York
Published: December 1 2009 15:56 | Last updated: December 1 2009 16:18

Pending home sales picked up for the ninth month running in October and climbed
to the highest level since 2006, as the US housing market continues to
stabilise.Separately on Tuesday, figures showed that factory
activity in the US grew for the fourth consecutive month in November,
but at a slower rate, as the manufacturing sector struggles to solidify
its recovery.


The National Association of Realtors
said that pending home sales, which reflect deals that have been signed
but not completed, rose by 3.7 per cent in October from September,
beating projections that they would slide. Compared with a year
ago, pending home sales are up by 31.8 per cent – the biggest annual
rise on record – as the first-time home buyer tax credit succeeded in
stimulating sales. Some economists have criticised the tax credit as a
measure that is “stealing” future demand, but NAR pushed for it to be
extended into next year.“The tax credit is helping unleash a
pent-up demand from a large pool of financially qualified renters, much
more than borrowing sales from the future,” said Lawrence Yun, chief
economist at NAR.In November, pending home sales rose in the northeast, midwest and south, but fell in the west. In spite of the recent rise in housing activity, commerce department figures showed on Tuesday that construction spending in the US was flat in October. Meanwhile, The Institute for Supply Management
said its manufacturing index slipped from 55.7 to 53.6 in November,
trailing economists’ expectations. A reading above 50 signals expanding
activity.“While the rate of growth slowed when compared to
October, the signs are still encouraging for continuing growth as both
new orders and production are still at very positive levels,” said by
Norbert Ore, ISM chairman. “Overall, the recovery in manufacturing is
continuing, but many are still struggling.”Manufacturers
surveyed by ISM said that car demand appeared to be strong and capital
construction was picking up. They are worried about the impact of the
weak US dollar, which is driving up commodity prices.Twelve out
of 18 manufacturing industries reported growth in November, led by
apparel, leather products, printing, petroleum and coal. Alan Ruskin, a
strategist at RBS Greenwich Capital, noted that although the headline
figure was disappointing, the jump in new orders was a good sign and
that the fall in inventories should signal that more production lies
ahead.“After the initial inventory-led boost, a key element
going forward will be whether final demand picks up sufficiently to
keep the upward impetus in place, or whether momentum will wane once
inventories are stabilised,” Joshua Shapiro, chief US economist at MFR

Fed Begins Testing a Strategy to Exit a Securities Program

By EDMUND L. ANDREWS

Published: November 30, 2009


WASHINGTON — The Federal Reserve
said Monday that it would begin testing its strategy to shrink its
trillion-dollar portfolio of mortgage-backed securities and eventually
unwind its biggest program to prop up financial markets.

The central bank emphasized that the move was strictly an exercise in operational preparedness and
did not signal a tightening of monetary policy or an effort to begin
raising interest rates.Indeed, Fed officials announced in
October that they were exploring the use of so-called reverse repo
agreements as a tool for carrying out their “exit strategy” from
emergency measures adopted during the financial crisis.But
the move did demonstrate that the Federal Reserve’s preparations were
becoming more concrete, and it highlighted the delicate task of
bringing monetary policy back to normal without disrupting financial
markets.The Federal Reserve slashed its benchmark overnight
interest rate virtually to zero last December. But because that was not
enough to revive credit markets, it also announced plans to drive down
long-term interest rates by purchasing almost $1.5 trillion worth of
government-guaranteed mortgage-related securities and Treasury bonds.Buying
up mortgage-backed securities helps push up their price and drives down
the effective interest rate, or yield. The purchases have already
helped double the size of the Fed’s balance sheet, to more than $2
trillion, since September 2008. Reverse repurchase agreements,
or repo agreements, are one way to tackle that job. Instead of actually
selling the huge portfolio of mortgage securities, which some Fed
officials fear would cause an abrupt spike in long-term interest rates,
the central bank would essentially lend them out and promise to buy
them back later.The Federal Reserve Bank of New York, which carries out the Fed’s trading activities, said it would begin small-scale testing now that it has discussed the plan with market participants.“Like
the earlier rounds of testing, this work is a matter of prudent advance
planning,” the New York Fed said in a statement. It “represents no
change in policy stance, and no inference should be drawn about the
timing of any change in the stance of monetary policy in the future.”
=======================================================================================================================
It will be pretty difficult for the Fed to find the backdoor to exit QE. Mortgage rates must stay low for the time being for there to be any chance of recovery in the housing market. My biggest fear is that while all of the G20 nations exit QE and dovish interest rate policies, the Fed will be stuck in a mouse trap. Growth needs to come from somewhere. I like commodity based inflation.

Scalpuman wrote:

By Craig Torres
Nov. 24 (Bloomberg) -- Federal Reserve officials said record-low interest rates might fuel "excessive" speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today.
"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period," minutes of the Nov. 3-4 meeting said, "including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations."
While policy makers agreed that the chances of such effects were "relatively low, they would remain alert to these risks,"
the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero "for an extended period" as long as inflation expectations are stable and unemployment fails to decline.
Gold prices touched an all-time high of $1,174 an ounce in New York yesterday as a slumping dollar boosted the appeal of alternative assets. The Standard & Poor’s 500 index has jumped
63 percent since its 2009 low on March 9, and the U.S. auctioned
$44 billion of two-year debt yesterday at a yield of 0.802 percent, the lowest ever.
"They are walking the fine line," said Alan Levenson, chief economist at T. Rowe Price Group Inc., in a Bloomberg Television interview. "They like the asset inflation now for what it does for consumers’ pocket books and ability to spend."
They need to prevent higher spending from fueling a rise in prices, he said.

Speculative Capital

Financial officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.
"Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year," the minutes said. "Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching."
The dollar weakened to the lowest level versus the yen in a month after the minutes were released. The dollar fell 0.5 percent to 88.56 yen at 3:21 p.m. in New York from 88.97 yesterday, after touching 88.36, the lowest level since Oct. 9.

Less Than Estimated

A report today showed the U.S. economy grew less than initially estimated last quarter as consumer spending trailed forecasts. The economy expanded at a 2.8 percent annual rate in the third quarter, less than the initial estimate of a 3.5 percent pace of expansion, the Commerce Department report showed.
"Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives," the minutes said.
Policy makers debated the usefulness of selling assets as part of the so-called exit strategy from the unprecedented expansion of credit to help reduce the central bank’s balance sheet and reserves held by commercial banks.
Several officials said asset sales "could be a useful tool" and "reinforce the effectiveness" of paying interest on reserves held at the Fed by commercial banks. Other policy makers "had reservations about asset sales," especially before any decision to raise interest rates, and said such sales may increase longer-term rates, the minutes said.

Trimmed Forecasts

Fed officials trimmed their forecasts for the U.S. jobless rate in 2010 and 2011, the minutes showed. Fed governors and regional bank presidents predicted the jobless rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from their June projection of 9.5 percent to 9.8 percent.
The financial crisis has eased in recent months for banks and large corporations, which have issued a record $1.171 trillion in bonds this year, according to Bloomberg data. The cost of three month loans in dollars between banks was 0.261 percent today, according to the British Bankers Association.
That’s down from 1.41 percent at the start of the year.
While large companies are taking advantage of the Fed’s low interest-rate policy in capital markets, consumers face tighter terms and less available credit. Consumer loans held by commercial banks in the U.S. fell to $846.7 billion in October, down 0.7 percent from the same month a year earlier.

‘Tight Conditions’

"Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms," the minutes said.
The Fed’s mandate for "maximum employment" remains challenged as businesses continue to reorganize and fire staff.
The U.S. economy has lost 7.3 million jobs since the recession began in December 2007. The unemployment rate last month rose to a 26-year high of 10.2 percent. U.S. payrolls shrank by 190,000 jobs last month, and the average workweek held at a record low.

wow low risk? arguably excessive risk taking is already happening, with the current fundamentals of the US economy and financial sector engaging in carry trade is already high risk in IMHO.... what do you guys think?