The Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.
The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.
“Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.
The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline yesterday in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months.
“The problem is it's an easing that's trying to offset a massive tightening in the market. Net-net, are we easier in policy? In some sense the answer is no,'' Ryding said.
By paying interest on reserves, the Fed can pump more cash into the financial system without worrying the overnight lending rate will drop to zero at the end of each day as banks withdraw excess reserves. The move doesn't preclude a further reduction in the target rate by the Federal Open Market Committee.
Biggest Surprise
The 0.75-point spread, announced yesterday, was the biggest surprise in the Fed's moves to implement its authority under the financial-rescue legislation, economists said. The Fed set the new rate Oct. 3, the same day the House approved the bill and President George W. Bush signed it into law.
The FOMC, composed of the Washington-based governors and 12 Fed regional-bank presidents, meets about every six weeks to set a target for the overnight lending rate, which the New York Fed tries to achieve by buying and selling Treasury securities from bond dealers.
The Fed requires banks to keep a level of reserves at the central bank. On those funds, the Fed will pay a higher rate equal to the average target rate over a one or two-week period less 0.10 percentage point. For excess reserves, the rate is the lowest FOMC target over a period less 0 (fast cash loan).75 percentage point.
The Fed said it would raise or lower the spread so the New York Fed trading desk can keep the federal funds rate near policy makers' target “based on experience and in response to evolving market conditions.''
The central bank didn't set a meeting schedule for discussing the reserve-interest rate.
Channeling Cash
The federal funds rate will probably trade below the FOMC's target as long as the Fed is channeling cash into the banking system, thereby prompting financial institutions to park their funds with the central bank each day. The rate may trade closer to the policy target when the credit crisis eases and the Fed begins to withdraw its emergency lending.
Still, a “soft federal funds rate does not provide a perfect substitute for a cut in the target,'' former Fed Governor Laurence Meyer and former Fed researcher Brian Sack, now with Macroeconomic Advisers LLC in Washington, said in a research note to clients.
The Fed said yesterday “the rate on excess balances should be set sufficiently low to provide an incentive for eligible institutions to trade funds in excess of required reserve balances and clearing balances in the federal funds market.'' The rate should also discourage banks from trading funds “far below'' the federal funds rate.
The interest payments begin Oct. 9.
Start Lending
A higher rate on payments may give banks too much of an incentive to keep funds at the central bank, said Peter Hooper, chief U.S. economist at Deutsche Bank Securities Inc. in New York and a former Fed official. “The whole objective here is to get banks to start lending again, and the more you pay them to hold on to their reserves, the less likely they'll be willing to lend.''
Even if the funds rate trades below the 2 percent target, it doesn't mean the FOMC is deploying a new policy tool by paying interest on reserves, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “I doubt the FOMC will want to give up their Fed funds rate target as the key indicator of monetary policy.''
Sunday is the new Monday.
From Wall Street to Washington, the U.S. credit crisis has claimed the leisurely weekend along with Lehman Brothers Holdings Inc. and Washington Mutual Inc.
“The news cycle is ruining everyone's weekend,'' Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ in New York, said in an e-mail. In addition to working more at the office, he's tethered to his BlackBerry on Saturdays and Sundays “waiting for the next shoe to drop.''
Every weekend since Labor Day, the meltdown has forced U.S. Treasury and Federal Reserve officials, members of Congress and Wall Street executives to huddle under pressure to react before Asian markets reopened.
On Saturday, Sept. 6, Treasury Secretary Henry Paulson gathered with the chief executive officers of Fannie Mae and Freddie Mac. On Sunday, Sept. 7, the government seized control of the mortgage-finance companies.
The following weekend, New York Fed President Timothy Geithner summoned Wall Street leaders to discuss the possible sale of Lehman Brothers. By Sunday night, Lehman was preparing bankruptcy papers and Merrill Lynch & Co. was selling itself to Bank of America Corp.
Forget Fishing
The next two weekends, government officials met in Washington to discuss a proposed $700 billion bailout of the financial-services industry.
The Senate approved the rescue on Oct. 1 and the House of Representatives is scheduled to vote on it today, setting up another weekend of work to study and implement details if the measure passes, or come up with something else if it fails.
“Every weekend, there's been a crisis,'' said David Kotok, chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey, which manages $1 billion in assets.
Kotok said he had planned to spend his September weekends on a fishing boat. Instead, he's been on his computer and phone, trying to translate details of the latest news to worried clients.
“I've been here the last three Sundays, and I'll be here this Sunday,'' John Silvia, chief economist at Wachovia Corp., said on Sept. 26, referring to the bank's Charlotte, North Carolina, headquarters. “A lot of people are here.''
Wachovia's What-If
Sundays at Wachovia were more like strategy sessions rather than actual workdays, Silvia said. He and his colleagues followed the news and came up with “what-if'' scenarios, he said.
The what-if for Wachovia came on the morning of Monday, Sept. 29, when the company agreed in principle to sell its consumer banking business to Citigroup Inc. The deal, triggered by Wachovia's mounting mortgage losses, was brokered by the Federal Deposit Insurance Corp. over the weekend.
Citigroup had more than 200 people “working on this nonstop'' for the 72 hours before the deal was announced, Citigroup Chief Executive Officer Vikram Pandit said in a Sept. 29 teleconference. Wells Fargo & Co. said today it had agreed to buy Wachovia for $15.1 billion in stock without federal assistance, ending the Citigroup deal.
Wachovia's Silvia said he'll be working again this weekend, studying the continued fallout from the crisis.
“It's almost most like the bubonic plague in Europe,'' Silvia said. “It just goes from one town to the other town and you wipe out the entire population fast.''
The Treasury Department sent Paulson and a team of aides to Capitol Hill at noon on Saturday, Sept (best payday loan). 27, spokeswoman Michele Davis said. Some worked with lawmakers until 3 a.m. on the rescue package, she said.
Sunday Buffets
That team was replaced the next day with one that also toiled overnight, this time on the Wachovia sale.
“Working weekends has become so normal here that we now have a buffet breakfast and lunch each day,'' Davis said. “Sunday was a spread more common on a day of watching football — wings, cheese sticks, hot dogs and chili.''
In New York on the weekend of Sept. 13, Shai Waisman, a partner at Weil Gotshal & Manges LLP, missed a planned dinner with friends from Texas who were on a layover at John F. Kennedy International Airport. He had to prepare papers for the Lehman bankruptcy, which his firm is handling.
That Sunday, a cousin from Israel arrived for a visit and let herself into his apartment. She stayed for seven days, Waisman said, and he never saw her once.
“I've never seen so many New Yorkers with the same ashen, exhausted look at the same obscene hours,'' Waisman said.
His firm is also handling the Washington Mutual bankruptcy. “I will be working this and every coming weekend for the foreseeable future,'' Waisman said in an e-mail yesterday.
`Days Run Together'
In Congress, the crisis has forced committees to schedule votes on other matters to late on weekend nights. The House Committee on Rules voted on tax-relief and energy-related bills at 10 p.m. on Sunday, Sept. 28, a “highly unusual'' time slot, said Emily Davis, a spokeswoman for Representative Pete Sessions, a Texas Republican who sits on the committee.
“The last time I had a day off was a couple weekends ago,'' Davis said. “The days just run together.''
The past several weekends, U.S. Representative Eric Cantor and his aides have dined on pizza, Popeyes fried chicken and “a couple nights of bad Chinese,'' said Rob Collins, chief of staff for the Republican from Virginia, who is deputy minority whip. About 10 Cantor staffers have been working weekends, Collins said.
Collins's wife, at home with their 10-month-old child, joined the social-networking site Facebook.com one weekend night as he worked until 11 p.m., Collins said.
The first message posted to her profile: “I wish Congress would pass this bill so my son could see his father for once.''
Paulson's Rest
Takeout Taxi, a Falls Church, Virginia, company that delivers food from Washington restaurants, has seen orders more than double to as many as 150 the last three Sundays from the typical 50 to 70, said call representative Jenna Burrows.
“Sundays are usually pretty slow, but we've had a dinner rush each night that lasts till 10 o'clock,'' Burrows said Sept. 29. “They want chicken tikka masala and kabobs.''
The long hours may be taking a toll on Treasury Secretary Paulson as well. During the marathon negotiating session Sept. 28 on Capitol Hill, he leaned back in his chair at one point and closed his eyes, sparking worries that he might need a doctor.
It wasn't a health crisis, just fatigue, said a person familiar with the deliberations.
NEW YORK — A measure of U.S. manufacturing activity contracted more than expected last month, hitting the lowest level since the aftermath of the Sept. 11, 2001 attacks, as new orders slowed dramatically.
The Institute for Supply Management on Wednesday released a September reading of 43.5, the lowest level since October 2001. The reading dropped from 49.9 in August, the largest one-month decline since January 1984, when it fell to 60.5 from 69.9.
A reading below 50 signals contraction.
"The headline ISM has plunged into recession territory," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Wall Street economists had predicted a much stronger reading of 49.5, according to the consensus estimate of those surveyed by Thomson/IFR. The index has been hovering on what economists call "the boom-bust" line for most of the year.
The survey of purchasing managers found new orders fell to 38.8 in September from a reading of 48.3 in August payday loans. Employment, deliveries, inventories and manufacturers’ order backlogs also fell.
Industries reporting contraction included apparel, furniture, machinery, transportation equipment and electrical appliances.
High prices for commodities, along with tight credit conditions, have begun to squeeze companies. Pilgrim’s Pride Corp., the nation’s largest chicken producer, said last week it expected a "significant" fiscal fourth-quarter loss.
Separately, the Commerce Department on Wednesday said construction activity was flat in August, better than the 0.5 percent fall economists expected. The big surprise was a 0.3 percent rise in residential activity, the first increase in housing since March 2007.
Still, the government revised July activity to show a much bigger drop of 1.4 percent, compared to the 0.6 percent decline initially reported.
Momentive Performance Materials Inc. wants to cut 49 employees in its warehouse and maintenance divisions and outsource that work to outside companies.
The company, which is in the process of moving its headquarters to a site in Rensselaer County, announced the plans to the affected employees on Wednesday. Momentive has 5,000 employees worldwide; 20 percent of them work at a plant in Waterford, where the 49 jobs—which make up the warehouse and maintenance divisions—would be eliminated.
All but six positions are unionized, so the local 359 of the IUE-CWA must approved those job cuts, said Momentive spokesman John Scharf. The two sides have 45 days for bargaining and negotiations, he said.
If approved, the cuts would begin before the end of this year.
Union officials could not be reached for comment.
Momentive was formed less than two years ago when General Electric Co. sold its silicone plants for $3.8 billion to Apollo Management LP, a private-equity firm in Westchester County. The company makes adhesives, resins and sealants for a number of industries and business sectors, including cosmetics, agriculture and electronics.
Last year, the company lost $254 million on sales of $2.5 billion.
In mid-July, the company announced that it was moving its global headquarters from Wilton, Conn., to a yet-undetermined site in Rensselaer County, creating 150 jobs in the process payday loan. In exchange for $6.5 million in state funds, Momentive has committed to $150 million in new projects at its Waterford site over the next five years.
Scharf said Momentive will save money and become more productive by cutting the 49 workers in question and contracting with outside firms, who will hire their own workers to do the work at Momentive’s Waterford plant. He declined to provide an estimate of those savings.
Scharf said Momentive has not yet selected any firm to provide the work.
“We are hopeful that within those 45 days, we’ll reach an agreement,” Scharf said. If not, the union and Momentive could opt to extend the negotiation period, or there could be a work stoppage, among other options, Scharf said.
Workers who are laid off could be eligible for severance pay packages, as well as continued medical and dental benefits, Scharf said. Certain employees would also be eligible for tuition reimbursement and retraining benefits for up to 12 months after they are released.
European Central Bank President Jean- Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for banks to shore up confidence in the global financial system.
“It has to go, for the sake of the U.S. and for the sake of global finance,'' Trichet said in an interview in Frankfurt with Bloomberg Television late yesterday. “I am confident, but of course it is the decision of the U.S. Congress.''
President George W. Bush and Senate leaders yesterday vowed to revive a plan aimed at buying distressed assets from banks that was rejected by Congress a day earlier. The vote roiled markets already struggling to cope with the collapse of Lehman Brothers Holdings Inc. European governments have helped rescue at least five banks since Sept. 28, with Trichet taking part in talks to save Belgium's Fortis over the weekend.
Trichet said a pan-European approach to the banking crisis was unlikely, saying “we are not a fully-fledged federation with a federal budget.''
“Each country has to mobilize its own efforts,'' said Trichet. “But of course there is a European spirit and that is the spirit of the single market.''
Trichet declined to answer questions about ECB monetary policy before tomorrow's interest-rate decision. All 58 economists surveyed by Bloomberg News expect the central bank to keep its benchmark rate at 4.25 percent.
Clear Message
U.S. stocks plunged after lawmakers rejected a proposal that would give the Treasury broad power to buy mortgage-backed securities saddling investors and financial institutions with losses. Banks have recorded $588 billion in writedowns since the start of last year.
“I think the message from the markets yesterday was clear,'' Senate Republican leader Mitch McConnell said on Sept payday loan. 30.
Stocks rebounded yesterday on optimism the bill will be passed later this week. The Standard & Poor's 500 Index rose 58.35 points to 1,164.74, recouping more than half of the previous day's 8.8 percent plunge.
European leaders are trying to better coordinate their response to the financial crisis. Luxembourg Finance Minister Jean-Claude Juncker said yesterday he expects to meet with Trichet and French President Nicolas Sarkozy on Oct. 4 to discuss “a more systematic approach.''
Trichet's ECB has so far chosen not to follow the Federal Reserve in slashing interest rates since credit markets seized up 13 months ago, injecting cash into their markets instead, while keeping monetary policy focused on inflation.
Price Stability
“What's needed is for us to continue to tell our fellow citizens that we will ensure price stability,'' Trichet said in an interview broadcast yesterday on the France 2 television channel.
Belgium, the Netherlands and Luxembourg on Sept. 28 agreed to inject 11.2 billion euros ($16 billion) into Fortis, the largest Belgian financial-services company.
Governments and other authorities have also taken steps to protect the U.K.'s Bradford & Bingley Plc, Brussels- and Paris- based Dexia SA, Iceland's Glitnir Bank hf and Germany's Hypo Real Estate Holding AG. Ireland yesterday guaranteed the deposits and borrowings of six lenders.
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