Gloom and Doom: The Federal Reserve

The Federal Reserve has revised down its economic outlook for 2009, and warned that the U.S.
is likely to face an especially gradual and prolonged period of recovery once it finally claws its way out of a deep global recession. Minutes from the FOMC’s late January meeting released today show that the Committee predicted the economy will contract this year by 0.5 to 1.3%, and that unemployment will rise to between 8.5 and 8.8%.
The nation’s steep declines in housing, trade, industrial production, spending, and employment rates are expected to overwhelm the government’s stimulus plans as currently proposed.


TREASURIES AND AGENCIES
• Treasuries tumbled across the curve today as the Federal Reserve signaled it does not intend to buy U.S. securities to lower consumer borrowing costs anytime soon. 30-year bonds were little changed throughout most of the day until release of the January 28th FOMC minutes indicated the wait-and-see position. The Committee believes that buying mortgage-backed bonds and agency debt is more likely to have a positive effect on credit markets.
• Tomorrow the government will announce the size of next week’s 2-, 5-, and 7-year note auctions. Market observers expect the total to be $97 billion, coming on the heels of last week’s record $67 billion sale.
• At the market close: UST 10-yrs down to yield 2.76%. UST 2-yrs down to yield 0.95%. USD$$ slightly stronger at $1.2546 vs. the euro and stronger at $93.695 vs. the yen. Gold up strongly to $984.90/ounce. Oil relatively unchanged at $34.62/barrel.

Banking system still on life support

As expected The Federal Reserve on Tuesday announced the extension through October 30, 2009, of its existing liquidity programs that were scheduled to expire on April 30, 2009. The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC.

In addition, to address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. This extension currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting. The Federal Reserve action to extend the swap lines was taken by the Federal Open Market Committee.

The current expiration date for the Term Asset-Backed Securities Loan Facility (TALF) remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility (TAF), do not have a fixed expiration date.

Fed Keeps Target Fed Funds Rate at 0-0.25%

Jan 28: FOMC decided to keep its target range for the federal funds rate at 0 to 1/4 percent, lowest since 1990 when Fed began publishing the rate. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs. The Committee is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets

FOMC: Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time

So, why is the market moving yields on long dated Treasury bonds UP!!

10:48 am today 10yr treasury yield is 2.687% up 0.023%
30yr treasury yield 3.436% up 0.018%

Market Reflections 1/28/2009

The FOMC statement wasn't a surprise but the stock market's rally may well be described that way. The Dow industrials surged 2.5% on reports that the administration is setting up a "bad bank" that will absorb bad debt from financial institutions. Bank shares posted big gains led by Wells Fargo, up 31 percent, Citigroup, up 19 percent, and Bank of America up 14 percent.

The stock market has been rallying all week, gains however that do not reflect strength in underlying earnings. Earnings in fact are proving significantly weaker than expected as weakness spills out far beyond the financial sector. Many are labeling the gains a bear market rally that could crumble on a run of bad economic news, such as for instance a big drop in durable goods orders or a big spike in jobless claims, reports to be issued tomorrow.

The FOMC statement pointed to a major risk that economic recovery may not take hold this year. The Fed said it will do everything it can to help the economy including kicking off a new program, called TALF, that will be aimed at unlocking credit for consumers and small businesses. The Fed said it may also begin buying Treasuries but it didn't commit itself, a fact that pushed money out of the Treasury market with the 3-month yield up 5 basis points at 0.18 percent and the 30-year up 17 basis points at 3.41 percent.

Huge swelling in stocks of crude oil couldn't hurt oil prices which like stock prices have proven resistant to bad news lately. February crude ended up slightly at $42.28 though talk is heavy in the oil market that prices may soon dip back to last month's $32 - $33 low for the now expired January contract. The move in stocks gave accounts confidence to sell gold which ended about $10 lower at an $889 level that is still very close to $900. The dollar ended little changed at $1.3152 against the euro.

Inflation IS coming, house values still decline

The Fed's FOMC meet's next Wednesday... I don't expect the Fed to reduce rates the remaining 25 Basis Points (1/4%) to zero.

It's been my position, that it's not a case of the cost of credit causing the credit crisis, it's a case of the lack of liquidity causing the credit crisis... and the resulting decline in value of residential/commercial property.

What lender in his/her right mind would lend against collateral that is declining in value! Politicians and Government..wake up! The problem is the value of every American home is declining.
Stop that decline by giving the Federal Reserve Bank the mandate to buy the mortgage on every residents primary residence and replacing it with an affordable mortgage at a 4% rate for 30 yrs based on the owners ability to pay, and you have a chance of stopping this death spiral.

So... In my mind... I didn't see the need to cut rates all along, and especially not to near zero!

But, the longer we're here at near zero, the better the chance is for soaring inflation by 2010!