Ben Bernanke Really Wants You to Buy a House

The Federal Reserve is doing everything in its power to get you to buy a house. On Thursday the Fed’s rate-setting committee said it will start buying $40 billion of mortgage-backed bonds every month from now until—well, it didn’t say when. Buying those bonds should translate into lower mortgage interest rates, speeding up the tentative recovery of the housing market. The Fed is betting that a stronger housing market will help lift the overall economy, which remains stuck in low gear more than three years past the end of the 2007-09 recession.

The Fed’s announcement—immediately dubbed QE3 by the markets, for round three of quantitative easing, or buying bonds to drive down long-term interest rates—had an electric effect on the mortgage market. Investors clamored for mortgage bonds, bidding up their price and thus pushing down their yields. The yield—that is, the effective rate that new investors receive—fell to just 1.01 percentage points above the yield on Treasuries. That was the narrowest spread in almost 15 years, signaling that investors are demanding only a small premium to own mortgage bonds instead of Treasuries. (Technically, that 1.01 is the difference between the yields on a Bloomberg index of Fannie Mae-guaranteed mortgage bonds and the average of 5- and 10-year Treasury notes.)

Mortgage rates are already at historic lows. The average rate on a 30-year fixed-rate mortgage in August was 3.6 percent, says Freddie Mac, down from 6.1 percent at the start of the recession in December 2007.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said in a statement at the end of its two-day meeting in Washington. At a press conference after the statement was released, Fed Chairman Ben Bernanke said that while the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern.” He added: “The weak job market should concern every American.”

The rate setters said they expect the federal funds rate will stay at “exceptionally low levels” at least through mid-2015—vs. a previous expectation of late 2014.

The Fed also released new forecasts in which FOMC participants upgraded their estimate for 2013 economic growth to a range of 2.5 percent to 3 percent, vs. a forecast in June of 2.2 percent to 2.8 percent. They predicted that unemployment in the final three months of this year will average 7.6 percent to 7.9 percent, in line with the June forecast of 7.5 percent to 8 percent.

Since the financial crisis began, the Fed has bought more than $2 trillion worth of Treasury bonds and mortgage-backed securities. Lately it had focused its efforts on Treasuries. Its holdings of mortgage-backed securities peaked at around $1.1 trillion in 2010 and has lately been a little more than $800 billion. The purchase of $40 billion a month, in addition to the continuing reinvestment of the proceeds from maturing securities, will quickly swell that amount.

Economists called the Fed’s move dramatic. Michael Feroli, chief U.S. economist of JPMorgan Chase (JPM), told clients in a note that the Fed’s actions were “extremely aggressive.” Scott Anderson, senior vice president of Bank of the West (BNP), wrote, “The Federal Reserve went all in today.” Barclays (BCS) Research called it “a bold shift in Fed policy.”

View the original article here

S&P 500 Rises Most Since ’87 as Bernanke Helps Offset Europe

January 19, 2012, 12:55 PM EST By Inyoung Hwang and Whitney Kisling

Jan. 19 (Bloomberg) -- U.S. stocks are off to the best start in 25 years as investors speculate Federal Reserve Chairman Ben S. Bernanke has done enough to insulate the economy from Europe’s debt crisis.

The S&P 500 has gained 4 percent, the most since it rose 10 percent over the first 11 days in 1987, according to data compiled by Bloomberg. Stocks are overcoming earnings that trailed estimates by the widest margin in three years as improvements in hiring, manufacturing and car sales extend the biggest fourth-quarter advance since 2003.

Bernanke has left the target rate on overnight loans between banks unchanged since the end of 2008, the longest stretch since at least 1971, data compiled by Bloomberg show. The policy may push more investors toward equities after yields on 10-year Treasuries finished 2011 within a quarter-point of a record low and the economy grew at an estimated 3.1 percent rate last quarter, said John Carey of Pioneer Investments.

“It’s probably a good idea not to fight someone so much bigger than you are,” Carey, a Boston-based money manager at Pioneer, said in a telephone interview on Jan. 18. The firm oversees about $220 billion. “The Fed will probably stay on its course,” he said. “I haven’t heard any indication that the Fed is considering boosting interest rates, so stocks will look attractive from an income point of view.”

Worst to First

Four companies whose declines were among the 10 biggest in the S&P 500 last year are among the 10 largest gainers in 2012. Netflix Inc., the Los Gatos, California-based movie service, climbed 42 percent, and First Solar Inc. in Tempe, Arizona, is up 27 percent. Charlotte, North Carolina-based Bank of America Corp., which lost 58 percent in 2011, gained 22 percent this year, while Sears Holdings Corp. in Hoffman Estates, Illinois, rose 24 percent after losing 56 percent.

The S&P 500 advanced seven of the first eight days this year, something that has occurred eight times since 1900, data compiled by JPMorgan Chase & Co. show. The mean return those years was 16 percent, the data show.

About $460 billion has been added to the value of American shares this year and the S&P 500 reached an almost six-month high yesterday, as economic reports outweighed concern that downgrades for European nations would worsen the debt crisis. France was stripped of its top rating by S&P and banks suspended talks with Greece over restructuring.

Economic Growth

“Europe is important but it’s not the end of the world if they see a recession,” James Dunigan, who helps oversee $107 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a Jan. 17 phone interview. “We’re starting to see that modest economic growth expectation for this year.”

The average forecast for U.S. gross domestic product growth this year has been rising since October. From a low of 2 percent, the median estimate in a survey of 72 economists has climbed to 2.3 percent, including a 0.2-point increase on Jan. 12 that represented the biggest one-day gain since projections for 2012 began, according to data compiled by Bloomberg.

Optimism about the economy is helping investors shrug off fourth-quarter earnings that have trailed estimates. Profit fell short of analyst forecasts by an average of 4.3 percent among the eight S&P 500 companies that posted results in the first week of earnings season, the data show. Three other quarters with a worse first week of earnings season were in 2007 and 2008 as the economy was slipping into to the worst recession since the 1930s.

Five-Month High

The S&P 500 increased 1.1 percent to 1,308.04 yesterday, the highest level since July 26. It climbed 1.4 percent over four days last week, reaching a five-month high of 1,292.48 on Jan. 11 even after Microsoft Corp., the world’s biggest software maker, said personal computer sales were probably worse than forecast in the fourth quarter.

“This year isn’t going to be about earnings,” James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management, said in a Jan. 17 phone interview. “There’s a lot of value in the market that could come just from people calming down about this recession, depression calamity. It’ll be about expanding that multiple.”

Combined S&P 500 profit is forecast to reach $104.76 a share in 2012, the highest level ever, according to data compiled by Bloomberg. The benchmark index is trading at 12.5 times forecast earnings. That compares with 13.4 at the beginning of 2011. The S&P 500’s average ratio in 2011 was 14.1 based on reported earnings. The five-decade mean is 16.4.

Unprecedented Stimulus

Central banks around the world have taken unprecedented measures to prevent the European debt crisis from triggering a global recession. European Central Bank President Mario Draghi last month unveiled plans to offer banks 36-month, 1 percent loans through two so-called longer-term refinancing operations, known as LTROs.

That combined with investor speculation of a third round of stimulus by the Fed and bets China’s central bank will ease monetary policy has fueled stock prices, according to Doug Noland, the money manager for Pittsburgh-based Federated Investors Inc.’s Prudent Bear Fund, which oversees $1.3 billion. It won’t last, he said.

“Markets over the years have become programmed to focus a lot on monetary stimulus,” Noland said in a Jan. 17 phone interview. “It’s a very dangerous reason to be buying equities. We saw in 2011 how QE2 didn’t have much fire power. We’ve seen European policy making repeatedly disappoint the markets.”

Target Rate Unchanged

Fed policy makers have left their target rate unchanged since the end of 2008, data compiled by Bloomberg show. The S&P 500 more than doubled from its low in March 2009 after Bernanke signaled in August 2010 the central bank would embark on a second round of asset purchases, known as quantitative easing, to boost the economy.

The index declined as much as 19 percent from its 2011 high in April through October last year as the program ended and concerns European leaders would fail to tame the region’s debt crisis escalated. It has since rebounded 19 percent.

Gross domestic product in the euro region will shrink by 0.2 percent this year, the median estimate in a survey of 21 economists surveyed by Bloomberg. The diverging outlooks are reducing lockstep price moves. The so-called 30-day correlation coefficient between the euro and S&P 500 fell 27 percent to 0.66 after reaching a record 0.91 in November.

Correlation Weakens

Speculation about whether European leaders would succeed in containing the credit crisis sent equity, currency and commodity markets up and down in unison last year. The relationship between U.S. stocks and the euro weakened after American unemployment fell to 8.5 percent from 9 percent and business activity as measured by the Chicago Purchasing Managers Index expanded at the fastest pace in seven months.

“A lot of people dismissed the original data in the fall as being backward looking,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “But when you started seeing jobless claims going down, it looked more and more like the U.S. had shrugged off a lot of the European contagion.”

Rallying stocks have done little to entice investors. Mutual funds that invest in U.S. equities posted $753 million in inflows for the week ending Jan. 11 after $7.1 billion in outflows during the first week of the year, Investment Company Institute data show. Customers pulled about $63 billion for the final three months of 2011, the data show.

The S&P 500 has gained an average 6.1 percent during presidential election years, compared with 4.4 percent in the years that follow, according to Bloomberg data going back to 1952. The index has posted a positive return for the last seven months of those years 87 percent of the time, data from the Stock Trader’s Almanac show.

“Committed bears have to pull in their claws a little,” according to Brian Barish, who helps oversee about $7 billion as Denver-based president of Cambiar Investors LLC. “On the more bullish side, corporate earnings continue to be very good and stocks in a lot of areas are quite undemanding in terms of their valuations,” Barish said in a Jan. 17 phone interview. “We could have a good year.”

--With assistance from Lu Wang in New York. Editors: Chris Nagi, Jeff Sutherland

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

View the original article here

Bernanke Opens the Black Box

By Peter Coy

Federal Reserve Chairman Ben Bernanke is looking rather Swedish these days. Before entering government, Bernanke was a leading academic exponent of inflation targeting as practiced in Sweden, New Zealand, Britain, Canada, and the European Central Bank. It’s a transparent approach to monetary policy that steers interest rates to keep the long-term inflation trend within an announced range. Bernanke set aside his plans for inflation targeting during the financial crisis, when he adopted heroic, ad hoc measures to save the big banks and rescue the global economy.

Now the quiet, circumspect chairman is going back to the commitment to transparency that he developed during his days teaching and researching economics at Princeton University. For the first time ever on Jan. 25, the 17 Federal Reserve governors and bank presidents will state their views on the appropriate course of the federal funds rate, the short-term interest rate that the Fed controls. Those forecasts will be collected and published, albeit without names attached.

“This is Bernanke getting away from the Greenspan model, the oracle, the guru,” says IHS Global Insight U.S. Economist Paul Edelstein. In a note to clients, Edelstein called it “a giant step toward enhancing the clarity and transparency of monetary policy.”

To fight the economic slump and financial crisis, the central bank lowered the federal funds rate to a rock-bottom 0 percent to 0.25 percent at the end of 2008 and has kept it there, saying economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Markets are now betting that the rate won’t go up until sometime in 2014. The new communications strategy will give dovish Fed voters a way to express their determination to keep rates tied to zero even past 2013.

The big idea is to fill a blank in the way the Fed makes its quarterly economic forecasts. (All 17 top officials participate in the forecast, even though the rate-setting Federal Open Market Committee has only 10 members—the five governors in Washington and five at a time of the 12 regional bank presidents.) The officials are currently instructed to assume “appropriate monetary policy” when they forecast economic growth, unemployment, and inflation. That is, they’re told to assume what should happen, not what they think will happen.

That can lead to confusion. For example, a Fed official who favors higher interest rates might predict inflation will stay mild—but only because he’s basing it on the (unrealistic) assumption that the FOMC will side with him and raise the federal funds rate substantially to chill the economy and keep prices from spiking.

Starting with the January meeting, the public will actually be told what Fed officials assumed about “appropriate monetary policy” when they made their economic forecasts. They still won’t be told who made which forecasts. Some participants in the December meeting worried that the new information “could confuse the public,” according to the minutes released on Jan. 3. “They have been pretty naive about how they’ve approached this whole communications policy,” says a frequent Fed critic, Robert A. Eisenbeis, chief monetary economist of Cumberland Advisors, a Vineland (N.J.) investment firm.

On the whole, Bernanke’s quest for transparency is a plus for investors and economists. It could cause headaches for the chairman. Now that Fed officials are asked—nay, required—to divulge their preferences on the long-term path of the federal funds rate, those who disagree with Bernanke may find it harder to swallow their pride and vote with him for the sake of unanimity.

Bernanke isn’t likely to lose a vote—this isn’t the Supreme Court, where Chief Justice John Roberts often finds himself in the minority—but “it could complicate his life a bit,” says Jan Hatzius, chief economist of Goldman Sachs. To Bernanke, still a professor at heart, that’s a small price to pay for a more predictable central bank.View From the Fed

Fed officials forecast GDP, unemployment, and inflation. In January they will reveal the “appropriate monetary policy” they assumed in making these forecasts.

The bottom line: Revealing Fed voters’ preferences for interest rates fills an important blank. But it could make it harder for Bernanke to enforce discipline.

Coy is Bloomberg Businessweek's Economics editor.

View the original article here

Bernanke Prods Savers to Become Consumers

December 22, 2011, 11:33 AM EST By Rich Miller

(Updates housing data starting in the 32nd paragraph.)

Dec. 21 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke finally may be catching a break: His easy-money policies are showing signs of speeding up the economic rebound three years after he cut interest rates to zero.

Housing may be nearing a bottom as record-low mortgage rates tempt more buyers into the market and confidence among homebuilders climbs to the highest since May 2010. Autos, another part of the economy sensitive to interest rates, are reviving, with carmakers reporting in November their highest sales pace in more than two years.

Banks also are starting to put more of their money to work, expanding commercial and industrial loans last quarter by the most since Lehman Brothers Holdings Inc. went bankrupt in September 2008.

“When the Fed sprinkles happy dust on the economy, we always respond,” said Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York. “The happy dust has been out there a long, long time, and I think it finally may be settling in some places.”

Since the recovery began in June 2009, households have focused on saving rather than spending, while banks have concentrated on rebuilding capital instead of lending. That may be changing, as both have made progress in rebuilding their balance sheets, Sinai said.

He sees growth accelerating in the range of 2.5 percent to 2.75 percent next year from 1.5 percent to 2 percent this year, when the economy was hit by what Bernanke called “some elements of bad luck” in a Nov. 2 news conference. These include a run- up in oil prices caused by the Arab spring and a sell-off in the stock market triggered by Europe’s debt crisis.

More Bad Luck

More bad luck may be in store if Congress fails to extend a payroll-tax cut and special unemployment benefits beyond the end of the year. That could knock a percentage point off growth in 2012, reviving fears of a double dip, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, is even more optimistic than Sinai. Crandall -- the most-accurate forecaster of the U.S. economy as of Dec. 1, based on Bloomberg calculations -- predicts growth next year of just over 3 percent, as companies become more confident about the outlook and expand their businesses.

The resilience of the economy will lift corporate earnings and stock prices, Sinai said. Operating profits of companies in the Standard & Poor’s 500 Index will rise by an average of 8 percent to 10 percent in 2012, and the stock gauge will end the year at 1,400, he forecasts -- up from 1,241.30 at 4 p.m. in New York yesterday.

Stocks Over Bonds

“Next year, stocks will do better than bonds,” Hoffman said. He sees stock returns in the “high single digits,” including dividends, compared with yields on 10-year Treasury notes below 2 percent.

Faster economic growth should be good news for President Barack Obama as he tries to secure a second term. It’s “possible” the jobless rate may be down to 8 percent by the November elections, he said Dec. 11 on the CBS television program “60 Minutes.”

Sinai and Dean Maki, chief U.S. economist at Barclays Capital in New York, agree.

“We see the unemployment rate at 8 percent at the end of 2012,” Maki said Dec. 14 in a radio interview on “Bloomberg Surveillance” with Tom Keene, compared with 8.6 percent last month. It will fall faster than many forecasters expect, in part because “more and more of the baby boomers are retiring every month,” he added.

‘Policy-Uncertainty Shock’

Big risks remain. The economy may be buffeted in the second half of next year by what Ethan Harris at Bank of America Merrill Lynch calls a “policy-uncertainty shock.” The co-head of global economic research in New York sees growth slowing to just over 1 percent in the third and fourth quarters of 2012, as households and companies wait to see what happens to former President George W. Bush’s income-tax cuts, which are scheduled to expire at the end of 2012.

Europe also is a concern. The sovereign-debt turmoil there and a deceleration in emerging-market growth may be “poised to knock us off course,” Federal Reserve Bank of Dallas President Richard Fisher said Dec. 16.

Demand “has slowly begun to strengthen domestically, yet developments in Europe, a slowdown in growth in emerging economies such as China and Brazil, and concerns about financial tripwires that might be triggered give rise to caution,” he said in a speech in Austin, Texas.

Fastest Expansion

The economy appears to be ending 2011 with the fastest expansion of the year, said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York. He forecasts growth of 3.5 percent in the fourth quarter, compared with what he said will be a downwardly revised 1.5 percent in the third. The Commerce Department already cut its third-quarter estimate to a 2 percent annual rate on Nov. 22 from 2.5 percent.

It was the late Nobel laureate economist Milton Friedman who first spoke of monetary policy affecting the economy with “long and variable lags,” as consumers and companies gradually adjust spending in response to changes in interest rates.

Transmission of this policy to the economy “has been gummed up” during the recovery, as households held back on spending and banks restrained lending, said Paul Ballew, chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio, and a Fed adviser. Now, “it’s starting to free up a bit.”

‘Well Above’ Average

The tangible-capital ratio for the banking industry stood at a post-World War II high of 8.5 percent in the third quarter, based on calculations by Keefe, Bruyette & Woods. The ratio -- which measures how much loss a bank can absorb before shareholder equity is wiped out -- is “well above” the 6.9 percent average since 1934, according to the investment bank.

With their balance sheets fortified, banks have increased commercial and industrial loans by an average annual pace of almost 10 percent in the third quarter, the highest since the comparable quarter in 2008, compared with a 1.7 percent decline in the past four years, based on Fed data.

U.S. banks also have moved to fill gaps left by crisis- plagued European counterparts as they reduce lending in America. San Francisco-based Wells Fargo & Co., the largest U.S. home lender, announced Nov. 2 that it was buying a $3.3 billion commercial real-estate-loan portfolio from Irish Bank Resolution Corp., formerly known as Anglo Irish Bank.

Better Financial Shape

Consumers also are in better financial shape, thanks to reductions in debt and the Fed’s record-low interest rates. Household-debt payments as a share of disposable income stood at 11 percent in the third quarter, the lowest since 1994 and down from a peak of 14 percent set in 2007, according to data from the central bank.

That has freed up money for spending, and the automobile industry is a beneficiary. U.S. light-duty car and truck sales rose to a seasonally adjusted annualized rate of 13.6 million in November, the best month since August 2009, based on data from Autodata Corp. in Woodcliff, New Jersey.

“We’re going to breach 14 million” for 2012 as a whole, said Ballew, a former director of global market and industry analysis for General Motors Co. in Detroit. He reckons sales this year will come in just below 13 million.

“It’s a good time to buy,” he said. “Affordability is at an extremely high level, and auto-loan rates are at the lowest they’ve ever been.”

Aging Cars

The average age of cars and light trucks on the road today has risen to 10.6 years, Jenny Lin, senior U.S. economist at Dearborn, Michigan-based Ford Motor Co., said on a Dec. 1 conference call. That’s above the seven-to-7.5 years Ballew says is the long-term average.

“We are going to see more and more of this pent-up demand realized,” Lin told analysts and reporters.

The story is much the same in housing. Low mortgage rates and the steep drop in prices have made homes more affordable than they’ve been in years, said Thomas Lawler, a former economist with government-backed mortgage company Fannie Mae in Washington, who is an independent housing consultant in Leesburg, Virginia.

There’s also a lot of pent-up demand in this market, as many young adults put off moving away from their parents because of the tough economic times, he added.

“Residential-investment spending has hit a bottom, and it probably will pick up a little bit next year,” he said.

Rising Home Sales

Sales of existing homes climbed 4 percent in November to a 4.42 million annual pace from a revised 4.25 million rate in October, the National Association of Realtors reported today. The revisions stretched back to 2007, reducing the number of homes sold in the U.S. by an average of 14 percent, magnifying the depth of the slump.

Now, “the market feels a little bit better than we would have expected,” Larry Sorsby, chief financial officer at builder Hovnanian Enterprises Inc. in Red Bank, New Jersey, said in a Dec. 15 call with analysts. While sales historically fall in November, “this year we’ve not seen as dramatic a slowdown as we have seen in recent prior years.”

The National Association of Home Builders/Wells Fargo index of builder confidence rose to 21 this month, the highest since May 2010, from 19 in November, the Washington-based group said Dec. 19.

Builders broke ground last month on the most houses in more than a year, led by a three-year high in multifamily units. Starts increased 9.3 percent to a 685,000 annual rate, the best since April 2010, Commerce Department figures showed yesterday. Building permits, a proxy for future construction, also rose to a more than one-year high.

May Improve

Housing starts have averaged an annualized, seasonally adjusted 653,000 in the last three months, up from an average 605,000 in the prior three months and 539,000 in the fourth quarter of 2010. They may continue to improve in 2012 to 675,000 for the year, said Hoffman, the second most-accurate forecaster of this statistic, according to Bloomberg calculations. He sees economic growth accelerating to a “modest” 2.5 percent next year from about 1.75 percent in 2011.

“Bernanke was right; there was an element of bad luck this year,” Crandall said. “Things don’t look bad for the U.S. in 2012.”

--With assistance from Craig Trudell in Southfield, Michigan. Editors: Melinda Grenier, Ken Fireman

To contact the reporter on this story: Richard Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

View the original article here

Bernanke Signals to Lawmakers Fed Has More Tools to Spur Growth

July 14, 2011, 12:21 AM EDT By Jeannine Aversa and Joshua Zumbrun

July 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled the central bank has more tools for monetary easing should the economy weaken and stymie efforts to generate jobs for 14.1 million unemployed Americans.

The Fed could pledge to keep the main interest rate at a record low and hold its balance sheet at $2.87 trillion for a longer period, Bernanke said yesterday in congressional testimony. It could also buy more bonds, increase the average maturity of its securities holdings or cut the interest rate it pays banks on their reserves, he said.

“We have to keep all the options on the table,” Bernanke said in semi-annual testimony to the House Financial Services Committee. The “economy still needs a good deal of support.”

After predicting the economy will strengthen during the second half of 2011, Bernanke left open the door to further stimulus by saying that sagging home prices, hard-to-get loans and 9.2 percent unemployment pose long-term obstacles to growth. Stocks rose and the dollar weakened after Bernanke’s comments.

“If we see another month or two of weak jobs data, then that will be a green light for further monetary stimulus,” said Gregory Daco, U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The Fed chief is scheduled to testify today to the Senate Banking Committee beginning at 10 a.m. in Washington.

Bernanke also told Congress yesterday that high U.S. budget deficits, if not curbed, could slow the economy and prompt an increase in interest rates. At the same time, he said Congress needs to be a “little bit cautious” about “sharp cuts” in federal spending in the near term because they could hurt the recovery.

Moody’s Action

Hours after he spoke, Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stalled, adding to concern that political gridlock will lead to a default. Bernanke, in his testimony, said a default would be a “major crisis.”

The Standard & Poor’s 500 Index rose 0.3 percent to 1,317.72 as of the 4 p.m. close of trading in New York, trimming its gain from 1.4 percent.

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke said. The Fed “remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate.”

At the same time, Bernanke said there is also the possibility that inflation could pick up in a way that would require the Fed to begin tightening credit and exit its record monetary stimulus.

High Hurdle

The “hurdle remains very high” for a new dose of bond purchases in part because inflation expectations have moved up, said Dan Greenhaus, chief global strategist at BTIG LLC in New York.

Break-even inflation rates calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity stood at 2.3 percent yesterday. That’s up from 1.62 percent when Bernanke signaled the possibility of a second round of bond purchases at his Aug. 27 speech last year in Jackson Hole, Wyoming.

Fed policy makers disagreed on whether additional monetary stimulus will be needed even if the outlook for economic growth remains weak, minutes of their meeting last month showed. Some members said a further slowdown in growth would signal a need for additional support, while others said the growing risk of inflation would require withdrawing stimulus sooner than currently anticipated.

Fisher Comments

Federal Reserve Bank of Dallas President Richard Fisher underscored those differences in comments to reporters after a speech yesterday.

“We’ve exhausted our ammunition,” Fisher said in Dallas. He holds a vote this year on the policy-setting Federal Open Market Committee.

Bernanke’s comments were his first since a government report on July 8 showed employers added 18,000 jobs in June, less than the most pessimistic forecast in a Bloomberg News survey of economists. Bernanke said “disappointing” job growth in May and June was partly a result of temporary effects, such as high energy prices.

He predicted that the pace of economic expansion would accelerate above 3 percent in the second half of 2011. That compares with growth “in the vicinity of 2 percent or maybe even a little bit less,” in the first half of this year, which is too slow to reduce unemployment, Bernanke said.

‘Uncertainties’ to Outlook

Bernanke acknowledged there are “uncertainties” in both directions -- about the strength of the economic recovery and the prospects for inflation -- over the medium term. He also reiterated his view that inflation won’t be a problem because gasoline and food prices, which had surged earlier this year, are now moderating.

Inflation, excluding food and energy, will be slightly higher this year, between 1.5 percent and 1.8 percent, Fed officials predicted last month. That’s up from a range of 1.3 percent to 1.6 percent under the forecast in April.

“As we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation,” Bernanke said.

Unemployment by the end of the year will decline to between 8.6 percent and 8.9 percent, according to the Fed’s forecast. That’s higher than the range of 8.4 percent to 8.7 percent under the previous forecast.

--With assistance from Craig Torres in Washington and Vivien Lou Chen in Dallas. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Jeannine Aversa in Washington at javersa@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

View the original article here

U.S. Stocks Fall as Bernanke Damps Speculation on More Stimulus

July 14, 2011, 12:57 PM EDT By Nikolaj Gammeltoft and Victoria Stilwell

July 14 (Bloomberg) -- U.S. stocks fell, driving the Standard & Poor’s 500 Index to the lowest level of the month, as Federal Reserve Chairman Ben S. Bernanke said he’s not prepared to take immediate action to stimulate the economy.

Raw-material producers and industrial companies were the biggest drags on the market among the 10 main industries in the Standard & Poor’s 500 Index, which erased a gain of as much as 0.7 percent. JPMorgan Chase & Co. rallied 2.7 percent to lead advances in the Dow Jones Industrial Average after investment banking profit surged and more customers paid their credit-card bills on time.

The S&P 500 slipped 0.4 percent to 1,312.59 at 12:23 p.m. in New York after falling to 1,311.98, its lowest level since June 30. The Dow dropped 22.10 points, or 0.2 percent, to 12,469.51 after surging 90 points following JPMorgan’s report.

“The market is going to be volatile until we get the situation in Washington resolved,” said Don Wordell, a fund manager for Atlanta-based RidgeWorth Capital Management, which oversees about $48 billion. “Earnings have been coming in pretty good and corporate balance sheets are in great shape,” he said in a telephone interview. “The economic data reports were positive.”

Bernanke testified for a second day before lawmakers after saying yesterday he’s prepared to provide more stimulus if needed. Bernanke said today that inflation now is “higher” and “closer” to the central bank’s informal target than was the case in August and that’s one reason why the Fed won’t immediately embark on a third round of bond-buying.

“We’re not prepared at this point to take further action,” he told the Senate Banking Committee.

Fed Stimulus

The S&P 500 has rallied 95 percent since March 2009 as the Fed used large-scale asset purchases to buoy the economy and companies posted earnings that beat analysts’ estimates. The index has still fallen 3.4 percent since April 29 this year on concern the economic recovery is at risk and as Europe’s sovereign-debt crisis grows.

Stocks were also pressured today after Moody’s Investors Service said late yesterday the U.S. government may lose the Aaa credit rating it’s held since 1917 on concern the country’s debt limit will not be raised in time to prevent a missed payment of interest or principal. President Barack Obama is considering summoning congressional leaders to Camp David this weekend to work on a plan to raise the debt ceiling after yesterday’s negotiations on a deficit-cutting plan of at least $2 trillion stalled, two people familiar with the matter said.

’Game of Chicken’

“Rating agencies don’t tell us anything we don’t know, but Moody’s warning underlines the seriousness of the situation and the game of chicken at Capitol Hill,” said Philip Marey, senior U.S. economist at Rabobank in Utrecht, the Netherlands.

Equities gained after government data showed retail sales unexpectedly increased and jobless claims fell more than economists estimated, bolstering confidence in the economy.

The 0.1 percent increase in retail sales reported by the Commerce Department compared with the median forecast of a 0.1 percent drop in the Bloomberg News survey of 80 economists. Excluding auto sales, purchases were little changed, the weakest performance since July 2010. Separate data showed initial jobless claims fell by 22,000 to 405,000 last week.

Earnings are gaining attention as more companies post second-quarter results. S&P 500 profits are forecast to have grown 13 percent in the quarter, the smallest increase in two years, according to data compiled by Bloomberg.

“The market is being driven by macro events such as the U.S. and European debt crises,” Giri Cherukuri, who helps manage $2.6 billion as money manager and head trader at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “But we’re heading into the heart of earnings season, and people are getting ready for a change towards a market that’ll be focused on the earnings reports of major companies.”

JPMorgan Earnings

JPMorgan, the second-largest U.S. bank, advanced 2.7 percent to $40.70 after the New York-based bank reported its highest half-year profit ever, at almost $11 billion. Second- quarter net income climbed 13 percent from a year earlier, to $5.43 billion, or $1.27 a share, six cents higher than the average estimate of analysts surveyed by Bloomberg.

ConocoPhillips jumped 4.2 percent to $77.49. The Houston, Texas-based oil company said it will separate its refining and marketing and exploration and production businesses.

Yum! Brands Inc. climbed 0.9 percent to $56.07 as the owner of the KFC and Pizza Hut restaurant chains boosted its earnings forecast for the year on increasing customer traffic at restaurants in China.

Hartford Financial Services Group Inc. declined 2.3 percent to $25.02. The seller of life insurance and property-casualty coverage said second-quarter net income plunged on catastrophe claims and the cost of asbestos liabilities.

Marriott International Inc. declined 8.4 percent to $34.02 after forecasting earnings that fell short of estimates. The largest publicly traded U.S. hotel chain said third-quarter earnings won’t be higher than 29 cents a share, missing the 30- cent average analyst projection.

--Editors: Jeff Sutherland, Michael Regan

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

View the original article here

What Now, Chairman Bernanke?

Joshua Roberts/Bloomberg

By Rich Miller

As a Princeton University professor, Ben Bernanke castigated the Bank of Japan in 2000 for a "case of self-induced paralysis" that led to years of stagnation and deflation. Now the Federal Reserve chairman may be allowing the central bank to fall into the same trap.

It's not as though Bernanke has been sitting on his hands. "The Fed has been a lot more proactive than the Bank of Japan was back then," says Alan S. Blinder, a former vice-chairman of the Fed's board of governors who is now a professor at Princeton. Under Bernanke, the Fed has conducted two rounds of quantitative easing, pumping money into the banking system through the purchase of close to $1 trillion in Treasury securities. That gave banks abundant funds to lend out to businesses and consumers. Bernanke has also lowered the rate the Fed pays the banks to hold their excess reserves to a minimal 0.25 percent, in essence encouraging the banks to seek higher returns by lending their money to commercial borrowers.

So where's the paralysis? By all but ruling out another cycle of bond purchases in recent statements, Fed officials have left themselves with few options to counter the slowing growth and rising unemployment of the past few months. This raises the risk that the U.S. recovery will remain, as Bernanke himself has said, "frustratingly" sluggish.

Fed officials are betting that the slowdown will prove short-lived, removing the need for further action. The thinking is that growth will pick up from July through December as the shocks from Japan's earthquake and an oil-price surge fade. Private economists agree. After growing at a 2.3 percent annual pace in the second quarter, the world's largest economy will expand at a 3.2 percent rate in the second half of the year, according to the median forecast of 67 economists surveyed by Bloomberg.

The danger is that, once again, such forecasts will prove too optimistic. In April most Fed policymakers were looking for the economy to expand by 3.1 percent to 3.3 percent this year. On June 22 they said they expected 2011 growth of 2.7 percent to 2.9 percent.

Allen Sinai, president of Decision Economics, says the chance that the U.S. will suffer a growth recession—that's when the economy expands at 1 percent or less for at least two quarters—has doubled recently, to 10 percent. "If I were at the Fed, I'd be looking at ways to do something like QE3," says Sinai. That would probably involve another round of bond purchases to make even more money available for low-cost loans. Fed officials don't seem so inclined. "We've done enough," Federal Reserve Bank of Dallas President Richard W. Fisher said in a June 13 speech.

When Bernanke raised the idea of QE2, he stressed the Fed's determination to avoid deflation. Those fears have eased with a rise in oil and food prices, says Roberto Perli, a former Fed economist who is a managing director at International Strategy & Investment Group in Washington. Consumer prices rose 3.6 percent in May from a year earlier, vs. a 1.1 percent gain in November, when the Fed began buying $600 billion worth of Treasury securities.

The stimulus helped nudge the inflation needle forward and gave investors confidence and cheap money to buy stocks. Yet quantitative easing has had a less discernible impact on growth, raising questions inside the Fed about the efficacy of further action, Sinai says. Opposition to QE2—congressional Republicans have attacked it for sparking inflation—also makes QE3 less likely.

Bernanke defends the decision not to pursue QE3, telling reporters on June 22 that with inflation higher and job growth stronger than last year, "the current outlook is significantly different." He argued that the Fed was not repeating Japan's mistakes and said the U.S. central bank stood ready to take more action if needed to aid the economy.

Blinder thinks the Fed is being "a little too passive." He wants the Fed to cut to zero the rate it pays banks on the excess reserves it holds for them. That would remove banks' incentive to park money with the Fed. Even better, says Blinder, the Fed could effectively charge banks for holding their reserves by paying a negative interest rate. More likely is that Bernanke will keep short-term interest rates, now around 0.25 percent, at that low level for even longer. "It is becoming increasingly likely that the Fed will be on hold until 2013," says Perli.

Another option, according to Michael Feroli, chief U.S. economist at JPMorgan Chase (JPM), is for the Fed to commit to an enlarged balance sheet for an extended period, thus reassuring investors that it won't quickly reduce the huge holdings of securities it accumulated through QE1 and QE2. A sell-off of the Fed's Treasuries would risk a crash in the bond market.

Should the rise in inflation prove transitory, as Bernanke has suggested, the Fed should plan more bond purchases, says Joseph Gagnon, an ex-Fed official who is a senior fellow at the Peterson Institute for International Economics. "If [Bernanke] says the little blip in inflation is temporary and it's going to go back below target, and he says he's very unhappy with the unemployment rate, then why isn't he doing more?" Gagnon asks. "It's really ironic. It's a self-induced paralysis."

The bottom line: The Fed may need to rethink its wait-and-see policy as economists cut their estimates for full-year growth for the U.S.

Miller is a reporter for Bloomberg News.

View the original article here