Fed’s Evans sees economy achieving ‘escape velocity’ by 2014

DES MOINES, Iowa, Thu Feb 28, 2013 — The U.S. economy should emerge from the doldrums next year if the Federal Reserve sticks to its super-easy monetary policies, a top Fed official said on Thursday, even as he warned that cutting back too early would be a “big mistake.”

The Fed is buying $45 billion in Treasuries and $40 billion in mortgage bonds per month, its third round of “quantitative easing,” and has said it will continue the purchases until it sees substantial improvement in the labor market outlook.

“I don’t think we are anywhere near the end of the program,” Chicago Federal Reserve Bank President Charles Evans told reporters after speaking to the CFA Society of Iowa here.

In fact it will likely take until at least the end of the year before the jobs outlook improves enough for the Fed to stop its bond purchases, Evans said, and it will likely be mid-2015 before unemployment drops enough to allow the Fed to begin to think about a rate increase from current near-zero levels.

“I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014,” he said, even as he acknowledged the downside threats to the economy from U.S. fiscal consolidation and economic troubles overseas.

“But we need to be careful not to undermine our own policies and remove accommodation prematurely, as the Japanese did,” he said. If the Fed were to raise rates too soon, he told reporters after the speech, “what would happen is the economy would slow and we’d find ourselves in another tailspin.”

Evans has been a key player in shaping the Fed’s ultra-easy policy stance, and was the first to champion the idea of tying Fed policy to specific levels of unemployment and inflation.

Fed seen maintaining bond-buying, but divisions remain

WASHINGTON, Wed Jan 30, 2013 — The Federal Reserve is expected to keep monetary policy on a steady path when it concludes a two-day meeting on Wednesday, though behind the scenes intensive debate continues over when it should curtail its controversial bond-buying program.

The policy statement issued by the U.S. central bank at the end of the meeting will likely be only slightly rephrased from the one in December to reflect minor changes in the economic outlook, notably reduced risks from financial turmoil in Europe.

Otherwise, economists say the policy-setting Federal Open Market Committee will maintain asset buying at $85 billion a month and retain the commitment to hold interest rates near zero percent until the unemployment rate falls to 6.5 percent, provided inflation does not threaten to breach 2.5 percent.

The Fed has taken unprecedented steps to try to spark a stronger economic recovery and drive down unemployment. It has kept overnight interest rates near zero since late 2008 and has launched three rounds of bond purchases, known as quantitative easing, to drive other borrowing costs down.

Fed missed warning signs in 2007 as crisis gained steam

WASHINGTON, Mon Jan 21, 2013 — Top policymakers at the Federal Reserve felt for most of 2007 that problems in housing and banking were isolated and unlikely to tear down the U.S. economy as they ultimately did.

Even as crisis signals started flashing red with the freezing of credit markets during the summer, Fed officials believed the troubles would be moderate and short-lived, according to transcripts of the 2007 meetings released on Friday after the customary five-year lag.

 

U.S. Treasury Secretary Timothy Geithner, then president of the New York Federal Reserve Bank, said during an emergency telephone call on August 10 of that year that most of Wall Street was still doing fine.

“We have no indication that the major, more diversified institutions are facing any funding pressure,” Geithner said according to the transcripts, which total 1,370 pages. “In fact, some of them report what we classically see in a context like this, which is that money is flowing to them.”

Similarly, Fed Chairman Ben Bernanke underestimated the risks of a looming financial blow-up.

“I do not expect insolvency or near insolvency among major financial institutions,” he said in December 2007.

By then, the Fed had already launched emergency liquidity measures and begun cutting interest rates, which by December 2008 would be brought all the way down to effectively zero.

U.S. economy to grow 2.5 percent this year: Fed’s Evans

CHICAGO, Mon Jan 14, 2013 — The U.S. economy is expected to grow by 2.5 percent in 2013, improving to 3.5 percent growth in 2014, Chicago Fed President Charles Evans said at the Asian Financial Forum in Hong Kong.

Evans also forecast the U.S. unemployment rate would be 7.4 percent this year, easing to about 7 percent in 2014.

Last month, Fed policymakers said they expected GDP growth of between 2.3 and 3.0 percent this year, and 3-3.5 percent in 2014.

New York Fed wins end of Greenberg’s AIG bailout lawsuit

NEW YORK, Mon Nov 19, 2012 – The Federal Reserve Bank of New York won the dismissal of former American International Group In. CEO Executive Maurice “Hank” Greenberg’s $25 billion lawsuit accusing it of acting unlawfully in bailing out the insurer during the 2008 financial crisis.

U.S. District Judge Paul Engelmayer in Manhattan on Monday dismissed in full the case brought on behalf of Greenberg’s company Starr International Co, which once held a 12 percent stake in AIG.

Greenberg had accused the New York Fed of wasting more than$60 billion of AIG and taxpayer funds in a “backdoor bailout” that let favored trading partners such as Goldman Sachs Group Inc. be repaid in full and freed from legal liability.

He also said the bank circumvented the law by letting the U.S. Treasury take a nearly 80 percent stake in the New York-based insurer without giving existing shareholders a vote.

But the judge found that AIG agreed to the bailout in a moment of “corporate desperation” and rejected what he called Greenberg’s likening of the New York Fed to a “loan shark” that forced AIG into an unfair bargain.

“Merely because the AIG Board felt it had ‘no choice’ but to accept bitter terms from its sole available rescuer does not mean that that rescuer actually controlled the company,” Engelmayer wrote.

A spokeswoman for David Boies, who is a lawyer for Greenberg, had no immediate comment. A spokesman for the New York Fed did not immediately respond to requests for comment.

Fed’s Evans: ‘essential’ to do as much as we can now for economy

HAMMOND, Ind., Wed Sep 26, 2012 – Chicago Federal Reserve Bank President Charles Evans on Tuesday reiterated his support for the U.S. central bank’s bold new push to lower borrowing costs and boost the so far “disappointing” recovery, and said the Fed should do even more.

“This was the time to act,” Evans said in remarks prepared for delivery to the Lakeshore Chamber of Commerce Business Expo in the industrial Chicago suburb of Hammond, Ind. “With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy.”

Evans’ prepared remarks were the same he gave on Sept 18, less than a week after the Fed decided to embark on a third round of asset buying and said it would not let up until the outlook for the labor market had improved substantially.

The central bank also said it would keep short-term interest rates near zero until at least mid-2015, even after policymakers expect it to show signs of strength.

To boost the impact of its actions, the Fed should explicitly say that it will be just as tolerant of inflation running slightly above its 2-percent goal as it is about inflation running slightly below, Evans said.

U.S. core inflation has run below 2 percent since 2008. Unemployment, at 8.1 percent, is well above the 5.5 percent to 6 percent that many economists believe is normal for the economy in the long run.

“We should not be resistant to policies that could move the unemployment rate closer its longer-run level, but run the risk of inflation running only a few tenths above our 2 percent goal,” he said. “Such accommodative polices could further improve the employment picture, even beyond our recent highly beneficial actions.”

U.S. second-quarter growth revised up, Fed still seen in play

WASHINGTON, Wed Aug 29, 2012 – The U.S. economy fared slightly better than initially thought in the second quarter, but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve.

Gross domestic product expanded at a 1.7 percent annual rate, the Commerce Department said on Wednesday as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand.

That was up from the government’s initial estimate of 1.5 percent growth released last month and in line with economists’ expectations. The economy grew at a 2.0 percent pace in the January-March period.

The report also showed that after-tax corporate profits unexpectedly rose at a 1.1 percent rate after sinking 8.6 percent in the first quarter.

While the composition of economic activity was fairly favorable, growth remains well below the 2-2.5 percent rate required every quarter to hold the unemployment rate steady, which could compel policymakers at the U.S. central bank to offer additional stimulus at their September 12-13 meeting.

“It shows slightly better government spending and consumer spending but overall the data suggest the economy stays in slow growth mode and is not likely to change,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. “This certainly strengthens the hands of the Fed to aid the economy.”

Fed examiner replacement hurt JPMorgan supervision: report

NEW YORK, Thu Jul 12, 2012 – The replacement of dozens of New York Federal Reserve bank examiners at JPMorgan Chase & Co. in mid-2011 hindered regulators’ ability to see the mounting risks that left the bank with an estimated $5 billion of trading losses, the New York Times reported.
The regulator replaced “virtually all of its roughly 40 examiners” at the bank to bolster the team and prevent it from becoming too close to JPMorgan executives, the newspaper said, citing current and former government officials who spoke on the condition of anonymity.
The change of the regulatory guard was made over several months, but taxed the ability of the new crew to understand the bank, which has more than $2 trillion of assets on its balance sheet. At the time, JPMorgan’s Chief Investment Office was increasing its bets on credit derivatives and changing a model for measuring risk in the unit.
The New York Fed and JPMorgan declined to comment, the paper said.
A JPMorgan spokesman declined to comment. Officials at the New York Fed did not immediately return Reuters’ calls for comment.
JPMorgan announced on May 10 that it had lost $2 billion on the trades and CEO Jamie Dimon said the losses could increase by $1 billion or more.
On Friday, when the company reports its second-quarter financial results, Dimon has promised to give a more detailed account of the losses and how they happened.

Like they did last summer: Fed may ‘Twist’ again

WASHINGTON, Wed Jun 13, 2012 – It has become a familiar choreography for the Federal Reserve: Officials ease monetary policy, and the economy improves. Then conditions weaken, reviving debate about the need for further stimulus.

The central bank again finds itself at that difficult juncture heading into a meeting next week. As Europe’s banking crisis intensifies and the labor market sputters, the Fed appears increasingly likely to offer more monetary stimulus – despite political opposition, internal reticence and concerns about whether it will be effective.

Given an outlook that is weak but not recessionary, the Fed could opt for the relatively low-hanging fruit of extending “Operation Twist,” its effort to drive down long-term borrowing costs by selling short-term securities to buy longer-term ones.

Another relatively costless tool it could employ would be to push official guidance for when overnight interest rates are likely to rise, now set at late 2014, even further into the future.

Many believe that with government bond yields already near record lows as investors flock to safety, an extension of Twist, which is due to expire at the end of the month, or even outright bond purchases, might not do much good.

Atlanta Federal Reserve Bank President Dennis Lockhart, who has argued that the bar for further monetary support remains high, captured the sentiment while speaking to reporters this week.

“In some respects the market has been doing the job for the Federal Reserve of suppressing the longer-term rates,” he said.

But a growing chorus of economists, both within and outside the Fed, say the central bank cannot sit idly by with the U.S. unemployment rate still at an elevated 8.2 percent – and showing few hints of falling.

They argue for an extension of Twist if not a further expansion of the Fed’s balance sheet through bond purchases, a policy known as quantitative easing.

“It’s not about lowering the long-term rate it’s about getting people to believe in growth,” said Michael Dueker, a former St. Louis Fed economist now at Russell Investments.

Part of the idea is to get businesses to spend some of the cash they are sitting on by giving them confidence in the recovery. That in turn should bolster employment, and make Americans more comfortable about their finances.

“It’s a signal from the Fed that they’re not going to let the economy stagnate,” said Dueker.

The Fed, which meets on June 19-20, has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in securities in two separate bouts of quantitative easing, or QE.

It then launched a $400 billion Operation Twist. The Bank for International Settlements estimated in March the policy would have a similar effect on 10-year Treasury yields as the second round of QE, potentially lowering them by about 0.85 percentage point.

Rates on the benchmark 10-year Treasury slumped to a record low of 1.442 percent on June 1, after the weak May payrolls data. Mortgage rates are also at their lowest ever, with a 30-year fixed mortgage available for less than 4 percent.

Fed’s Daniel Tarullo says shadow banking creates risks

SAN FRANCISCO, Tue Jun 12, 2012 – A top Federal Reserve official on Tuesday renewed a call for tighter rules governing the so-called shadow banking system, in which financial firms exchange large amounts of cash, to prevent a repeat of the panic that provoked the financial crisis of 2007-2009.

Fed Governor Daniel Tarullo did not comment on the outlook for the economy or monetary policy in the speech, which covered similar ground to remarks he made last month.

Tarullo said that despite financial reforms, the shadow banking system has the potential to destabilize the broader financial system.

“The shadow banking system … has only been obliquely addressed, despite the fact that the most acute phase of the crisis was precipitated by a run on that system,” Tarullo told a conference organized by the San Francisco Fed.

In the wake of the crisis and the painful recession that followed, the Fed has taken on a bigger role in financial oversight and Tarullo has been a leading voice on the topic.

He said regulators and scholars need to do more work on financial institutions that behave like banks but are outside the scope of bank regulators.

“We should act now to address some obvious sources of vulnerability in the financial system,” he said.

Tarullo repeated his support for proposals to bolster the soundness of money market mutual funds. He endorsed a suggestion that supervisors set limits on banks’ reliance on funding provided by money market funds.