New Zealand business confidence fell to a 17-year low in March, led by retailers and home builders, who expect economic growth will slow this year.
A net 6.4 percent of companies surveyed expect their sales will decline over the next year, the lowest reading since 1991, according to a report released by ANZ National Bank Ltd. in Wellington today. The net figure subtracts the number of pessimists from optimists.
Record-high interest rates and a global credit crisis have made companies more reluctant to hire and invest, adding to signs growth in the $104 billion economy will slow this year to about half the 3.1 percent pace in 2007. Weaker domestic demand may give Reserve Bank Governor Alan Bollard scope to cut the benchmark interest rate from a record 8.25 percent.
“Growth looks to have stalled, but is more likely to be negative in the March quarter,'' said Cameron Bagrie, chief economist at ANZ National in Wellington. “Inflation pressure will eventually recede in a weak growth environment. Interest rates do not need to remain at elevated levels when inflation is receding.''
New Zealand's dollar fell to 79.33 U.S. cents at 5:15 p.m. from 79.57 cents immediately before the report.
Asked about the general economy, a net 58 percent of the 467 companies surveyed said it will worsen over the next year. That compares with 44 percent in February.
Workers, Investment
A net 8 percent of firms expect to fire workers over the next year and just 1.3 percent plan to invest more in plant and machinery, according to the survey.
About 45 percent of companies say their profits will fall while 38 percent plan to raise prices in the next three months to recover costs.
The construction industry is the most pessimistic, ANZ National said. Residential investment intentions are the lowest in the 20-year history of the survey.
A second report today showed building approvals fell 6.5 percent in February, the fourth decline in six months, as rising home-loan interest rates and falling prices cool the property market.
Bollard last week said interest rates will need to stay at high levels for some time to combat inflation. Eight of 15 economists surveyed by Bloomberg News last month expect the central bank will keep rates unchanged until next year.
Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan's 18 years at the helm.
After this month's near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern — the longest-serving policy maker — said in a speech yesterday that it's possible “to build support'' for practices “designed to prevent excesses.'' New York Fed President Timothy Geithner, whose district bank took on almost $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision-making, and there's no indication his views have changed.
For Fed policy makers, “the consequences of their permissiveness have become so disastrous that they simply can't keep singing the same old tune in public,'' said Tom Schlesinger, executive director at the Financial Markets Center in Howardsville, Virginia.
While the soul-searching is unlikely to result in immediate changes to monetary policy, Stern's comments show how the credit freeze has forced officials to scrutinize long-held philosophies about the Fed's role in markets, and even ask how their current policies may undercut those views.
“As a risk manager, the Fed needs to take account of both directions, not just dealing with the aftermath,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “We have had two asset-prices bubbles in the last 10 years that have had big implications for the Fed's desire for a more stable macroeconomy.''
Stern's Reflection
Stern, 63, has been president of the Minneapolis Fed since 1985 and is currently a voting member of the rate-setting Federal Open Market Committee. In his speech to the European Economics and Financial Centre in London yesterday, he said that “while I have not yet changed my opinion that asset-price levels should not be an objective of monetary policy, I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices of technology stocks.''
He added that “it is well within the realm of possibility for policy makers to build support for, and at least obtain tolerance of, policies designed to address excesses.''
Fed officials have spent years wrestling with how to prevent bubbles without damaging the economy through high interest rates, and few have come up with an answer. That's partly because the debate focused on use of the main policy rate instead of regulatory tools.
Greenspan Philosophy
For two decades, the ruling philosophy has been Greenspan's. “It is far from obvious that bubbles, even if identified early, can be pre-empted at a lower cost than a substantial economic contraction and possible financial destabilization,'' Greenspan told the American Economic Association in 2004.
“I have always said if we could defuse a nascent asset bubble, I would be all for it,'' Greenspan, 82, said in an e- mailed response to a question yesterday. “The reason I am against is that in my experience it cannot be done. I know of no occasion when such actions have been successful.''
But his successor, Ben S. Bernanke, and his team now find themselves reconsidering their approach to everything from regulation to the fate of the world's largest securities dealers. The collapse of the U.S. subprime-mortgage market has led to $208 billion in writedowns and credit losses since the start of 2007, pushing Bear to the brink of bankruptcy before its purchase by JPMorgan.
In his public remarks, Bernanke, 54, has opposed using interest rates to rein in asset prices, favoring keeping the benchmark rate focused on managing growth and inflation.
Role For Regulation
At the same time, he does see a role for regulations to reduce the likelihood of bubbles and protect institutions when they pop. He is also open to using other tools, as his response to the seven-month credit crisis has shown. And if the Fed gets more supervisory responsibility for securities firms, officials are likely to take more interest in policies that can discipline markets and balance incentives, economists said.
“If it is the case that asset prices matter for the intermediation of credit, then they have to worry about it,'' said Vincent Reinhart, former director of the Fed's Monetary Affairs Division, and now a scholar at the American Enterprise Institute in Washington.
The Fed has cut the benchmark rate 2 percentage points this year, the fastest pace in two decades. Bernanke has also changed the composition of the Fed balance sheet, absorbing more mortgage bonds, and swapping Treasuries for even private-label and commercial mortgage-backed securities, in effect influencing prices of securities tied to housing.
Bailout `Hazards'
Stern has spoken publicly only seven times in the last year. The Minneapolis president co-authored a 2004 book called “Too Big to Fail: the Hazards of Bank Bailouts,'' which concluded that while governments shouldn't avoid public support for creditors of failing banks, they should minimize that backing because of the distortions it produces.
“If someone like that, steeped in the Fed's traditions, opens the door to a new or different approach to policy, we have to take it seriously,'' said Robert McTeer, a former president of the Dallas Fed.
Australian banks are “weathering the storm'' caused by the slump in global credit markets, remain profitable and have “sound'' capital reserves, central bank Governor Glenn Stevens said.
“There is very little direct exposure to the U.S. subprime problems,'' Stevens said in a speech to a Euromoney conference in Sydney today. “The main reason for the resilience is many years of robust economic growth, sound regulatory foundations and prudent risk management.''
The strength of the financial system may give the Reserve Bank of Australia scope to increase interest rates again if inflation running at the fastest pace since 1991 doesn't cool. The bank has raised rates four times since August to the highest in almost 12 years even as policy makers in the U.S., Canada and the U.K. cut borrowing costs to cushion their economies from the global slowdown.
“The Reserve Bank has tended to be toward the more optimistic end of the range in their views on the global economy,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's biggest mortgage lender.
“The strength of the domestic economy and the near-term inflationary trajectory still favor a lift in the official cash rate target to 7.5 percent by mid year,'' Blythe said.
Stevens conceded the “local financial community has certainly been affected by the global turmoil.'' National Australia Bank Ltd. and Commonwealth Bank, the country's two largest lenders, extended declines in Sydney share trading today. They have A$34 billion ($31 billion) in market value this year.
Bank Stocks
The 49-member S&P/ASX 200 Finance Index has slumped 27 percent the past six months as banks including National Australia and Commonwealth revealed they've loaned money to companies caught in the global credit squeeze.
The Australian dollar traded at 92.08 U.S. cents at 3:13 p.m. in Sydney from 92.08 cents immediately before Stevens' comments. The yield on the two-year bond fell 3 basis points, or 0.03 percentage point, to 6.16 percent.
Australian companies including Centro Properties Group, Allco Finance Group Ltd. and ABC Learning Centres Ltd., all of whom expanded overseas with debt from Australian banks, have lost most of their market value since the collapse of the U.S. subprime mortgage market.
Stevens said today the central bank has increased liquidity to Australian financial institutions coping with the global credit squeeze “substantially, as required.''
Home Loans
“It's naive to think Australian banks aren't affected,'' said Brian Johnson, a banking analyst at JPMorgan Chase & Co. in Sydney. “While they don't do big subprime lending, we remain a country of debtors in which housing borrowings are so much bigger than retail deposits.''
Stevens said the cost to banks of raising funds has moved independently of the overnight rate.
The central bank increased the benchmark interest rate by a quarter point to 7.25 percent on March 4. Policy makers next review the rate again on April 1.
“This speech is in line with our view that rates are on hold as the Reserve Bank watches the impact of the global credit crunch,'' said Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney. Futures contracts show most traders expect the bank will leave rates unchanged next week.
Australia's five largest banks have added an average of 77 basis points, or 0.77 percentage point, to their home-loan interest rates this year, more than the 50 basis points added by the Reserve Bank to the overnight cash rate target in that period.
Lending Standards
The nation's banks have tightened lending standards in the face of a global financial system that is under “more strain'' than at any time since the early 1990s, the Reserve Bank said in its half-yearly Financial Stability Review published today.
Stevens said it's not realistic to expect local banks to move lending rates in line with the official rate in the recent environment. “In setting the cash rate, the Reserve Bank has taken account of these shifting relationships,'' he said.
The governor also noted the past nine months have “been a very challenging time in international financial markets.''
The U.S. Federal Reserve has responded to the freeze in credit markets by cutting its benchmark interest rate at the fastest pace in two decades to 2.25 percent.
In an emergency action earlier this month, the Fed also reduced the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan to help finance the purchase of Bear Stearns Cos. after a run on that securities dealer.
The Fed's move isn't a “bailout'' as “shareholders and managers of Bear Stearns have lost a great deal of money, but the system will be stabilized,'' Stevens said today.
Supervision
The turmoil in financial markets has sparked increasing discussions between central banks on how markets are furnished with liquidity, “including across borders, which may be needed given the globalized nature of markets,'' Stevens said.
In addition, “there will need to be a focus in the supervisory community and the banks themselves on liquidity management,'' he said.
Prime Minister Kevin Rudd echoed Stevens' comments. “The current crisis has highlighted the importance of disclosure and transparency'' and suggests the need for “better rules,'' Rudd said in Melbourne before embarking trip to Washington, New York, Brussels, London and Beijing in the next three weeks. The Treasury, Reserve Bank and regulators have been discussing these matters with their global counterparts, Rudd added.
The Federal Reserve further expanded its role as a backstop to Wall Street dealers, setting up a new company to manage and sell $30 billion of Bear Stearns Cos. assets.
In disclosing terms of a financing arrangement to speed JPMorgan Chase & Co.'s purchase of Bear Stearns, the Fed said yesterday it hired BlackRock Inc. to oversee and sell the assets, which will be placed in a new company created by the central bank.
Fed Chairman Ben S. Bernanke, trying to restore confidence to financial markets by averting a collapse of Bear Stearns, is pushing the central bank into new territory. Yesterday's announcement shows the Fed acting like a bank liquidator — a role traditionally performed by the Federal Deposit Insurance Corp. — for Bear Stearns, a firm whose main regulator is the Securities and Exchange Commission.
“Bernanke has taken the bit in his teeth,'' said Tom Schlesinger, executive director of the Financial Markets Center in Howardsville, Virginia. “I can think of nothing in recent or distant memory that remotely resembles what the Fed is doing here, certainly within the context of the central bank's operations.''
The Fed last week agreed to help JPMorgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of U.S. mortgage bonds. In an effort to shore up Wall Street's other firms, it also agreed to become lender of last resort to all 20 primary dealers in Treasury notes.
BlackRock Selected
The Fed said March 16 it would provide financing to JPMorgan for $30 billion of Bear Stearns assets. Yesterday, it released terms of the funding, including some details on the company managed by BlackRock. The Fed said JPMorgan will shoulder the first $1 billion of any losses, disclosed that the loan will be for 10 years and carry the 2.5 percent interest rate charged to commercial banks at the discount window.
Fed officials defended their role in the Bear Stearns rescue as necessary to prevent a broader financial panic. Credit markets have been roiled by concerns that borrowers won't repay debt, and funding has dwindled for securities firms, hedge funds, and mortgage banks.
Still, Bernanke and New York Fed President Timothy Geithner may have overstepped and altered the role of the government in financial markets, said Joe Mason, associate professor of finance at Drexel University in Philadelphia.
`Far Outside'
“The Fed is so far outside the traditional bounds,'' said Mason, a former economist at the Office of the Comptroller of the Currency, one of five federal bank regulators. “It isn't innovative, it is taking a step back in time to a system of direct credit'' where the government decides “who gets funding and who doesn't,'' he said.
Under the terms of the deal, the Fed will loan $29 billion, and JPMorgan will loan $1 billion, to a new company based in the U.S. state of Delaware.
The new company will then send $30 billion to JPMorgan in exchange for some Bear Stearns assets valued at that amount as of March 14. BlackRock has been hired by the central bank to manage and liquidate the assets to repay the loans, interest, and management expenses of the company. JPMorgan will be first to absorb losses on the assets, to $1 billion, if there are any.
“This sounds like a purchase of a portion of Bear Stearns's portfolio,'' Vincent Reinhart, a former head of Fed's Division of Monetary Affairs, and now a scholar at the American Enterprise Institute in Washington, said in a Bloomberg Television interview. “The Federal Reserve Bank of New York seems to have an equity interest. It's not your father's kind of loan.''
RTC Similarities
The structure resembles that of the Resolution Trust Corp., the agency created in 1989 to dispose of the assets of insolvent savings and loans banks, said Schlesinger of the Financial Markets Center.
From 1986 through 1995, 1,043 savings banks with over $500 billion in assets failed, costing taxpayers $75.6 billion, according to an FDIC analysis.
“What they're doing is setting up a mini-RTC within their own domain,'' said Schlesinger. “The Fed is not only breaking new ground with respect to policy initiatives, but breaking new ground functionally in taking on a bad-asset resolution capacity without any authority from Congress to do so, without any oversight.''
Bernanke testifies to the Joint Economic Committee of Congress on April 2. Senator Charles Grassley, an Iowa Republican member of the chamber's finance committee, said last week he wants details of the Fed's involvement in the rescue of Bear Stearns.
“I want to understand what the downside risk for the taxpayer is and any upside potential,'' Grassley said in a statement on March 20.
The global financial crisis that has raged for months shows no signs of ending and the chiefs of the big central bank chiefs are scratching their heads over how to restore faith in the world’s credit markets.
Global policymakers have unveiled a catalogue of measures since August 2007 to try and return confidence to markets. All have failed and left in their wake multi-billion dollar banking casualties in the United States, Britain and Germany.
Massive injections of emergency funds worth hundreds of billions of dollars, a giant $150 billion U.S. economic stimulus package and wholesale rewriting of the rules to allow commercial banks to pledge risky assets to secure high quality central bank funds, have all come to nothing.
Banks will still not lend money to each other in the wholesale interbank market that ordinarily provides the lubrication to keep the global financial system turning because the fundamental problem that remains to be tackled is how to put a floor under plunging U.S. real estate prices.
“The mortgage problem in the U.S. is a direct consequence of a failure of policymaking through the 1990s and it’s going to take corrective action from policymakers to sort it out,” Paul Markowski, president of New York-based investment advisory firm Global Research Partners, told Reuters.
“Some form of mortgage bailout is likely to have to feature at the core of the solution and that’s what central bankers and regulators are now coming to terms with.”
So far, central banks have only been prepared to lend against mortgage-backed securities — one of the fastest growing area of the global capital markets and worth about $4.5 trillion — rather than buy them outright.
A Financial Times Story on Saturday said officials in the U.S., the UK and the euro zone were now in talks about the feasibility of mass securities purchases using public funds as a solution to the credit crisis, but the Federal Reserve and the Bank of England dismissed the story. The European Central Bank declined to comment.
The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.
Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.
“Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. “Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''
Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.
“Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets. “You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''
Oil Plunges
Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce on March 17. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July.
Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. This week's rate cut brought the Fed's target for overnight loans among banks down to 2.25 percent.
Because commodities such as oil and gold are priced in dollars, they have risen as the U.S. currency has weakened in response to the Fed's previous rate cuts.
Oil, soybeans, platinum and wheat all jumped to records this year. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures has gained more than 20 percent every year since 2001. The index is up 10 percent this year.
Gold had rallied as much as 43 percent since Sept. 18, when the policy makers began lowering the federal-funds rate for the first time in four years.
Buying Euros
“The markets have been buying euros against the dollar, buying oil and buying gold as hedges,'' said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago, a unit of Bank of Montreal. “The Fed calmed the markets.''
Bernanke, 54, is expanding the Fed's monetary-policy toolkit as he seeks to keep strains in financial markets from spiraling into a full-blown meltdown. The world's biggest banks and securities firms have reported $195 billion in asset writedowns and credit losses since 2007 stemming from the collapse of the U.S. subprime mortgage market.
Expanded Collateral
Fed officials on March 11 announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.
Earlier this month, the Fed increased the size of separate funding auctions to $100 billion in March from a previously announced $60 billion.
The Fed yesterday said it had lent $28.8 billion to large U.S. securities firms under the program announced on March 16, its first extension of credit to non-banks since the 1930s.
The Fed also put taxpayer money at risk by making available up to $30 billion to JPMorgan Chase & Co. for the purchase of Bear Stearns.
Not everyone is convinced that Bernanke has managed to turn the tide for financial firms.
“He has taken extraordinary measures, things that we haven't seen since the Great Depression,'' said former Fed vice chairman Alan Blinder, a Princeton University professor. “He's working overtime, literally and figuratively, to get this panic under control. But so far, it's not under control.''
U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 yesterday as investors sought the safety of government debt. Bill rates declined as low as 0.387 percent as finance company CIT Group Inc. drew on $7.3 billion in credit lines after being shut out of short-term debt markets.
“This is all about money,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois, who has been trading gold since 1973. “The Fed can control the price of money but the banks still don't want to lend.''
Federal Reserve Chairman Ben S. Bernanke bucked investors' bets on a deeper interest-rate cut without spoiling the biggest U.S. stock-market rally in five years.
Policy makers yesterday lowered their benchmark rate by 0.75 percentage point, falling short of traders' bets for at least a full percentage point. The Federal Open Market Committee, in its announcement, left the door open for further reductions. At the same time, it restored language saying inflation has picked up.
“The Fed still has its primary focus on growth and the threat to growth from markets,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “This is still a huge move,'' given that Alan Greenspan, Bernanke's predecessor, never lowered rates more than a half-point at a single meeting, O'Sullivan said.
The Standard & Poor's 500 Index climbed 4.2 percent yesterday to 1,330.74, the most since October 2002. The dollar, which fell to a 12-year low a day earlier, staged its biggest rally against the yen in nine years after the decision. Treasury notes declined.
The regular meeting came two days after emergency moves to lower the discount rate by a quarter-point and become a lender of last resort for the biggest Wall Street dealers. Bernanke, 54, and his colleagues have spent the past week striving to prevent a global financial-market meltdown after a run on Bear Stearns Cos.
`Pretty Gutsy'
“It's in some sense pretty gutsy'' to cut rates less than investors anticipated “at a time when market expectations are so fragile,'' said Brian Sack, a former Fed researcher who is now senior economist at Macroeconomic Advisers LLC in Washington.
“The FOMC has been prioritizing financial-stability and growth risks over inflation risks,'' Sack said. “But the statement reminded us that the inflation risks are part of the policy decisions as well.''
Sack and former Fed Governor Laurence Meyer, vice chairman at Macroeconomic Advisers, had forecast a full percentage-point reduction.
Yesterday's move brought the benchmark overnight interbank lending rate to 2.25 percent after a cumulative 3 percentage points of cuts since September.
While the decrease was smaller than traders and some economists expected, the move and the Jan. 22 cut by 0.75 percentage point are the largest reductions in the federal funds rate since it became the chief tool of monetary policy about two decades ago.
European Shares
Stock markets in the U.S. may not maintain their rally today. In Europe, the Dow Jones Stoxx 600 index fell 1 percent as of 11:47 a.m. in London, giving up an earlier gain of as much as 1.1 percent. The FTSE 100 index lost 0.7 percent and futures on the Standard & Poor's 500 index in the U.S. slipped 0.4 percent.
The dollar fell against the euro, weakening to $1.5696 per euro from $1.5625 and erasing most of yesterday's gains. It declined to 99.07 yen from 99.85 yen.
The decision and statement may have resulted in part from a compromise between Bernanke and officials who wanted smaller rate cuts, including two who dissented.
Dallas Fed President Richard Fisher and Charles Plosser, president of the Philadelphia Fed, rebelled, preferring a “less aggressive'' move. It's the first time two policy makers have broken with Bernanke publicly and the fifth straight FOMC rate move in which Bernanke has failed to achieve unanimity.
Plosser's Dissent
Plosser's dissent is the first for the former University of Rochester economist, who joined the Fed in 2006 and has taken some of the toughest anti-inflation views among policy makers. Plosser, 59, is a voting FOMC member for the first time this year. It's the second straight opposing vote for the 59-year-old Fisher, a former deputy U.S. trade representative in the Clinton administration.
“When inflation gets unanchored, and the long bond market goes up, that's going to really hurt longer-term investment and the recovery in the mortgage markets, which are the root cause of this recession,'' former Fed Governor Susan Bies said in an interview yesterday with Bloomberg Television.
Such concerns may have been a factor in bringing back language noting that price increases have “been elevated'' and saying that “some indicators of inflation expectations have risen.'' The Fed's preferred price gauge, which excludes food and energy, has for three months run above the 2 percent upper band of officials' long-term inflation projections.
Monitor Inflation
In the previous statement, on Jan. 30, the Fed said only that it “expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.'' The Fed reiterated those points yesterday. Bernanke and Vice Chairman Donald Kohn, in remarks last month, played down inflation concerns and focused on risks to growth.
“Certainly the Fed's concerns about inflation have increased even as they cut rates aggressively,'' said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “It didn't prevent them from doing a large rate cut, but they have taken note of the rise in inflation expectations.''
Yesterday's statement nods to Fed actions over the past two weeks to ease credit-market strains, saying that the rate cut, “combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.''
Earlier this month, the Fed said it would lend $200 billion in Treasuries to dealers and add another $200 billion through auctions of funds and repurchase agreements.
Bernanke sent investors a message that “We're in control,'' said Paul Lennox, treasurer of Custom House Ltd., a Victoria, British Columbia-based firm that specializes in global foreign exchange. “We're coming to an end. Don't rely on us to keep cutting rates.''
Federal Reserve Chairman Ben S. Bernanke may be readying the deepest interest-rate cut in a generation as the central bank struggles to prevent a meltdown in financial markets and a recession.
Traders predict the Federal Open Market Committee, meeting today in Washington, will lower the overnight lending rate by a full percentage point or more, based on futures prices in Chicago. That would be the biggest reduction since 1984, when Paul Volcker led the central bank, and would bring the benchmark rate down to 2 percent.
Policy makers may promise more cuts if needed with a statement that warns of further risks to the economy as the housing recession breeds widening losses among banks and securities firms. The Fed took emergency steps over the weekend to stave off a financial panic, lowering its rate on direct loans to banks and becoming lender of last resort for Wall Street's biggest dealers in government bonds.
“The Fed has moved very aggressively to deal with liquidity problems that are major,'' said former Fed Governor Lyle Gramley, now a senior adviser at Stanford Group Co. in Washington, who said today's reduction may be as much as a full percentage point. “They need to be aggressive on the monetary policy side. This is the worst crisis we have faced in more than 50 years.''
Shifting Expectations
The severity of the crisis was underscored by the Fed's emergency action on the evening of March 16, the first weekend policy shift since 1979. A week ago, the debate among economists was whether the Fed would cut by 50 basis points or 75 basis points. Now, a reduction of 1 percentage point is seen as a sure bet among futures traders and some anticipate a move of as much as 1.25 percentage points. Either would be the deepest since Volcker's Fed lowered the federal funds rate to 10 percent from 11.75 percent in October 1984.
Treasuries were little changed, with the two-year yield at 1.35 percent at 1:48 p.m. in Tokyo.
Bernanke, whose views on monetary policy were shaped by his scholarly work on the Great Depression, has seen losses at the world's biggest banks and securities dealers balloon to $195 billion since the start of last year, culminating in the collapse last week of the fifth-largest securities firm, Bear Stearns Cos.
Bernanke has failed to calm the turmoil, which his predecessor Alan Greenspan calls the “most wrenching'' since the end of World War II, even after lowering the overnight rate five times since September and committing to pump an unprecedented $400 billion in cash and securities into the banking system.
Avoiding a Crash
Policy makers have scheduled an announcement at about 2:15 p.m. in Washington.
Bernanke, 54, has already stepped up efforts to keep strains in markets from triggering a crash. The Fed agreed March 16 to help finance JPMorgan Chase & Co.'s purchase of the failing Bear Stearns and the central bank offered last week to lend $200 billion in Treasuries in exchange for debt that includes mortgage-backed securities.
“The Fed will be extremely hesitant to disappoint the markets,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc. and a former member of the Richmond Fed staff, who predicts a full percentage-point cut. “Things are still very fragile. We are in a situation where credit tightening has started to feed on itself, and it has real economic implications.''
Recession Signals
Recent economic data suggests the first recession since 2001 may have begun in December or January. Harvard University economist Martin Feldstein, a member of the committee that officially declares when a recession has started, said last week that he believed a recession was under way and it could be the most severe since World War II.
“They are worried about the spillover effects of financial markets and what they can do to keep that from happening,'' said Robert Eisenbeis, former research director at the Atlanta Fed who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.
The economy expanded 0.6 percent at an annualized pace last quarter and economists surveyed by Bloomberg News this month predicted the pace will slow to 0.1 percent in January to March.
“Bernanke believes the economy is in a very serious situation right now,'' said Paul Kasriel, director of economic research at Northern Trust Co. in Chicago. “The Fed is worried about a very severe credit contraction that can cause an even weaker economy.''
Fed's Forecast
Fed officials lowered their projections for economic growth by half a percentage point this year, according to quarterly figures published last month.
Fed Governor Frederic Mishkin said March 4 that the economy may face an “adverse feedback loop,'' where tightening credit and a declining economy create a cycle that leads to further deteriorating conditions. The FOMC discussed that possibility during the January meeting, according to its minutes.
“The overriding concern is the condition of the financial markets.'' said William Ford, former president of the Federal Reserve Bank of Atlanta and now chairman of the finance department at Middle Tennessee State University. “They are fighting a financial panic and want to preserve orderly markets.''
Standard & Poor’s Ratings Services hiked its estimate for how many bad mortgage investments banks will have to write off their books, though the ratings agency said Thursday the end may be in sight.
S&P expects banks to record $285 billion in "write-downs," or assumptions that their investments are no longer as valuable. Banks including Citigroup Inc (C, Fortune 500). and Merrill Lynch & Co (MER, Fortune 500). have written off more than $150 billion of investments, in part because they are backed by home loans considered unlikely to be repaid.
S&P’s previous estimate for write-downs was $265 billion.
The ratings agency said Wall Street is likely more than halfway through the write-downs it will have to record. In many cases, it seems like banks have written off a lot more than actual losses are likely to be, S&P said.
President George W. Bush today will argue that the sputtering U.S. economy is fundamentally sound without offering new initiatives to stimulate it or to help homeowners facing mortgage defaults.
“Americans should have confidence that this economy will return to stronger growth,'' said White House spokesman Tony Fratto, previewing an address Bush plans to give today to a gathering of business and finance leaders in New York. “You shouldn't look for new major announcements.''
A surge in defaults on mortgages to higher-risk borrowers spurred the collapse of the U.S. home loan market. Defaults have continued to rise even as the Federal Reserve has cut the benchmark interest rate five times since September. The Bush administration has urged lenders to help homeowners by modifying mortgage terms.
Congress wants the government to do more. House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd, saying the U.S. is in a recession, offered a plan yesterday to let the Federal Housing Administration insure refinanced mortgages after lenders reduce principal to help struggling borrowers.
The two lawmakers are leading congressional efforts to tackle the surge in foreclosures, which reached record levels in the fourth quarter of 2007. The plan they unveiled yesterday goes beyond the Bush administration's industry-led approach that urges lenders and servicers to modify loans for borrowers who can't make their monthly payments.
`Addressing Wall Street'
Bush speaks to the Economic Club of New York, which was founded “during the panic of 1907,'' according to Jan Hopkins, its executive director. The 750-member club includes chief executives, investment strategists, money managers and professors.
“What he's really doing is addressing Wall Street,'' Hopkins said in an interview yesterday. She said the president accepted an open-ended invitation to speak to the club. “The timing was the White House's,'' Hopkins said.
After the speech, Bush will be questioned by two panelists: Paul Gigot, editorial page editor of the Wall Street Journal, and Gail Fosler, president of the Conference Board, a New York- based economic research group best known for its consumer confidence survey and report on leading economic indicators.
“They're going to want to know the president's view of the economy,'' Hopkins said. “The questions will be on housing, markets, the dollar, interest rates, oil prices, taxes.''
`Temporary Phenomenon'
Fratto called the housing crisis “a temporary phenomenon'' that will pass.
“We know exactly how many subprime mortgages are out there,'' he told reporters yesterday at the White House. “We know that over time we're going to be able to work down those inventories'' and “this economy will return to growth.''
Fratto said Bush, in his speech, will talk about “how he sees the economy today.''
“Americans should have confidence that this economy will return to stronger growth,'' Fratto said. He cited the $168 billion stimulus plan the administration worked out with Congress last month, which includes tax rebates ranging from $300 to more than $1,200 for some families.
“We're going to start to see the benefits of that soon,'' Fratto said. Checks are scheduled to arrive in mailboxes beginning the second week of May.
Fratto said Bush today will once again call on the Democratic Congress to extend tax cuts that expire in 2010, and he will note that foreign investments are welcome in the U.S. and that he's pushing for new trade agreements that he says creates jobs.
“Those are the kinds of things the president is focused on,'' Fratto said.
`Epicenter' of Crisis
John Lonski, chief economist at Moody's Investors Service, said Bush should tailor his remarks toward the “epicenter'' of the U.S. credit crunch: troubled homeowners who can't pay the monthly mortgage.
“Until you improve the housing outlook, you're going to have considerable difficulty at encouraging banks that are now saddled with these troubled home mortgages to increase the supply of credit to private sector borrowers,'' he said in a telephone interview yesterday.
The Economic Club of New York has hosted past U.S. presidents, including Woodrow Wilson, John F. Kennedy, Richard Nixon, Ronald Reagan and George H.W. Bush, according to its Web site.
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