March 22 (Bloomberg) -- Stocks declined for a third day and the dollar rallied on concern rising interest rates and widening government deficits will hamper the economic recovery. Greek bonds and shares fell.
The MSCI World Index dropped 0.7 percent at 9:15 a.m. in New York, marking its longest losing streak in six weeks. Futures on the Standard & Poor’s 500 Index retreated 0.7 percent. The dollar strengthened against 15 of its 16 most- traded counterparts. Greece’s ASE Index sank 2.9 percent and the premium investors demand to hold the nation’s 10-year notes instead of benchmark German bunds widened 18 basis points.
India’s central bank raised interest rates for the first time in almost two years late on March 19, saying that controlling prices was imperative after inflation accelerated to a 16-month high. German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on a package to help Greece tackle the region’s biggest deficit.
“There has been an uptick in sovereign-default concerns and there is uncertainty over support for Greece,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “Investors are likely to be disappointed again from the EU summit this week and that’s going to continue to weigh on the euro to the benefit of the dollar.”
Health-care stocks in the MSCI World Index slipped 0.3 percent for the second-best performance among 10 groups. The U.S. House passed the most sweeping health-care legislation in four decades, rewriting the rules governing medical industries and ensuring that tens of millions of uninsured will get medical coverage. The approval will remove a significant “overhang” from the industry and be viewed positively, Credit Suisse Group AG analyst Ralph Giacobbe wrote in a note today.
Europe, Asia
The Stoxx Europe 600 Index declined 1.1 percent while the MSCI Asia Pacific Index dropped 0.9 percent. Vedanta Resources Plc, the largest copper producer in India, led basic resources shares lower, falling 2.3 percent in London.
Royal Dutch Shell Plc slipped 0.9 percent after agreeing with PetroChina Co. to buy Arrow Energy Ltd. for A$3.5 billion ($3.2 billion). PetroChina Co., the nation’s biggest energy producer, declined 2.7 percent in Hong Kong.
U.S. Futures
The decline in U.S. futures indicated the S&P 500 may trim gains from three straight weekly advances. The Dow Jones Industrial Average snapped an eight-day winning streak on March 19 after India’s unexpected rate increase.
The Dollar Index, which tracks the currency against those of six U.S. trading partners, climbed for a third day, adding 0.3 percent. Government bonds gained, with the yield on the German bund falling 2 basis points to 3.08 percent. The yield on the 10-year Treasury note slipped 1 basis point to at 3.68 percent.
Maintaining government debt at post-crisis levels may reduce growth in advanced economies by as much as half a percentage point a year from the pace before the first global recession since World War II, John Lipsky, first deputy managing director of the International Monetary Fund, said in Beijing yesterday.
“Risk aversion has come up after developments in India and Greece,” said Henrik Gullberg, a fixed-income strategist at Deutsche Bank AG in London. “Any exiting of the current accommodative policy stance is bad for risk appetite and good for the dollar.”
Greek bonds tumbled for a third day, with the yield on the two-year note jumping as much as 38 basis points to 5.5 percent. National Bank of Greece SA, the nation’s biggest lender, led stock declines in Athens, sinking as much as 6 percent. The cost of insuring against a default on Greek government bonds rose, with credit-default swaps climbing 26 basis points to 356, according to CMA DataVision.
Default Swaps
Credit-default swaps on the Markit iTraxx Crossover Index of high-yield European corporates climbed 14 basis points to 467, according to JPMorgan Chase & Co. Credit-swap gauges in Europe rolled into their 13th series today. New series of the benchmarks are created every six months when companies are added or dropped depending on their ratings, cost of protection and ease of trading.
The MSCI Emerging Markets Index dropped 1.2 percent for a third day of declines. South Korea’s Kospi Index and Taiwan’s Taiex Index fell 0.8 percent, and India’s Sensitive Index slid 1 percent. Russia’s Micex Index lost 1.3 percent and the ruble depreciated against the central bank’s target basket for the first time in a week, slipping 0.5 percent. The rand weakened 0.9 percent against the dollar in limited trading during a public holiday today.
Copper for delivery in three months fell 1.7 percent to $7,310 a metric ton on the London Metal Exchange, retreating for a third day. Crude oil for April delivery dropped 2.4 percent to $78.76 a barrel in New York trading, falling for a third day. The April contract expires today.
Monday, March 22, 2010
Lipsky Says ‘Acute’ Debt Challenges Face Advanced Economies
March 22 (Bloomberg) -- Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging-market nations has also reached a “worrisome level,” he said.
“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.
Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.
Budget Deficit
The U.S. budget deficit widened to a record in February as the government spent more to help revive the economy. The gap grew to $221 billion after a shortfall of $194 billion in February 2009, the Treasury Department said on March 10. The figures indicate the deficit this year will probably surpass the record $1.4 trillion in the fiscal year that ended in September.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Lipsky said. The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, he said.
‘Bulging Fiscal Deficits’
“When we look at the picture right now, recovery has been encouraging in both developed and emerging economies, and inflation has remained fairly contained,” said David Cohen, a Singapore-based economist at Action Economics. “The biggest cloud over the outlook would be bulging fiscal deficits. The concern is that the situation in Greece is a dress-rehearsal for problems in bigger economies.”
Greece is racing to cut its borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. In the U.S., President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse.
Inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion, Lipsky said. Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously.
Pension, Tax Reforms
The bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures, Lipsky said.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, the IMF official said. Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.
Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability.
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging-market nations has also reached a “worrisome level,” he said.
“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.
Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.
Budget Deficit
The U.S. budget deficit widened to a record in February as the government spent more to help revive the economy. The gap grew to $221 billion after a shortfall of $194 billion in February 2009, the Treasury Department said on March 10. The figures indicate the deficit this year will probably surpass the record $1.4 trillion in the fiscal year that ended in September.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Lipsky said. The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, he said.
‘Bulging Fiscal Deficits’
“When we look at the picture right now, recovery has been encouraging in both developed and emerging economies, and inflation has remained fairly contained,” said David Cohen, a Singapore-based economist at Action Economics. “The biggest cloud over the outlook would be bulging fiscal deficits. The concern is that the situation in Greece is a dress-rehearsal for problems in bigger economies.”
Greece is racing to cut its borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. In the U.S., President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse.
Inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion, Lipsky said. Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously.
Pension, Tax Reforms
The bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures, Lipsky said.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, the IMF official said. Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.
Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability.
Wednesday, March 10, 2010
Dollar Bond Sales Surge in Asia as Borrowers Tap New Investors
March 10 (Bloomberg) -- The lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds.
BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent in the aftermath of the seizure in credit markets.
“It’s one of the cheapest times to borrow in U.S. dollars, and at the same time, there’s a lot of cash floating around,” said Rajeev de Mello, head of Asian investment for Western Asset Management Co., which oversees $506 billion. U.S. and European pension funds “want a slice of the action,” De Mello, who is based in Singapore, said in a phone interview.
The extra yield demanded for dollar debt from investment- grade companies in Asia instead of Treasuries has fallen to 2.44 percentage points from 7.62 percentage points in December 2008, according to JPMorgan Chase & Co. Spreads fell close to a two- year low because growth in the region is helping lead the world out of the worst financial crisis since the Great Depression.
Korea Development
Korea Development Bank, the South Korean state-run lender known as KDB, boosted the size of its 4.375 percent bond sale last month to $750 million from $500 million, the most in U.S. dollars that the company has borrowed for so long at so cheap a rate, Bloomberg data show. The debt, due in 5.5 years, yielded 203 basis points more than Treasuries and the spread has narrowed to 166 basis points, Bloomberg data show.
KDB’s $1 billion of five-year 5.3 percent bonds, yielded 218 basis points, or 2.18 percentage points, more than similar- maturity Treasury yields when sold in January 2008.
BOC Hong Kong sold $1.6 billion of 5.55 percent bonds maturing 2020 on Feb. 4. Evergrande Real Estate issued $750 million of five-year notes on Jan. 22, the largest Chinese real estate high-yield offering ever, according to Bank of America Merrill Lynch, which helped manage the sale. High-yield bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
The difference between the average cost of borrowing in dollars and in local currencies in Asia has narrowed to 94 basis points from 426 basis points a year ago, when U.S. stock markets bottomed, according to HSBC Holdings Plc indexes.
Asian companies are “switching funding to international markets” as they borrow more and for longer periods and as the cost of borrowing in dollars becomes more competitive, Morgan Stanley credit strategist Viktor Hjort said in a phone interview from Hong Kong.
Borrowing Costs
Money-market rates have fallen in the period. The three- month London interbank offered rate for dollars was last at 0.25425 percent, compared with 1.33125 percent a year ago, Bloomberg data show. Libor is the interest rate at which banks borrow funds from one another and is a financing benchmark.
“The rally in the bond market has meant U.S. dollar funding costs are at least as competitive again,” said Sean Henderson, head of debt syndication at HSBC in Hong Kong. Local- currency sales in Asia still exceed dollar debt as “many Asian companies’ funding needs are too small to justify issuing offshore debt,” he added.
Local Currencies
Local-currency bonds by Asian companies total $112.2 billion this year, compared with $121.4 billion in the same period of 2009, Bloomberg data show.
“We were surprised to see new investors in our latest three global bond offerings, including some big U.S. asset managers who aren’t traditional buyers of our notes,” Yoon Hee Sung, the director of international finance at Export-Import Bank of Korea, the state-run lender known as Kexim, said in an interview in Seoul.
Kexim sold $1 billion of 4.125 percent, 5.5-year notes on March 2, priced to yield 195 basis points more than Treasuries.
U.S. Federal Reserve Chairman Ben S. Bernanke has said the “nascent” U.S. recovery means rates of zero to 0.25 percent will be needed for an “extended period.” That contrasts with growth in Asian nations.
International Monetary Fund projections show developing Asia’s economy will expand 8.4 percent this year, compared with 2.7 percent in the U.S. and 1 percent in the euro area. Analysts boosted 2010 Asian corporate earnings estimates 4 percent, Credit Suisse Group said in a note to clients March 8.
U.S. Investors
“There is significantly more interest from U.S. and European investors as evidenced by new order allocations,” said Richard Chun, a Hong Kong-based money manager for New York hedge fund Claren Road Asset Management LLC, which manages about $3 billion globally. Now, 60 to 75 percent of recent deals are being allocated to U.S. and European investors versus 20 to 30 percent several years ago, he said.
Bank of Baroda and Bank of India have canceled dollar bond sales this year citing market volatility from Europe’s sovereign debt crisis. Total issuance won’t be affected, Morgan Stanley’s Hjort said.
Morgan Stanley predicts new Asian dollar bond sales of at least $17 billion in the coming three months. The New York-based bank also forecasts bond redemptions of $27 billion -- almost half 2009’s total new issuance -- globally this year.
“While there are some risk factors facing credit markets, supply is unlikely to be what spoils the party this time,” Hjort said.
Bucyrus, Citigroup, Medtronic, Navistar: U.S. Equity Preview
March 10 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses. Prices are as of 8 a.m. in New York.
AeroVironment Inc. (AVAV:US) declined 5.4 percent to $22.51. The maker of U.S. military spyplanes reported third- quarter profit excluding some items of 30 cents a share, missing the average analyst estimate in a Bloomberg survey by 7.4 percent. The company also lowered its 2010 sales forecast to between $240 million and $250 million. On average, the analysts surveyed by Bloomberg estimated revenue of $288.7 million.
Allergan Inc. (AGN:US) rose 2.3 percent to $62.75. The health-care company’s Botox for reducing facial wrinkles was approved by U.S. regulators to treat muscle spasms in the elbow, wrist and fingers, the Food and Drug Administration said.
American Eagle Outfitters Inc. (AEO:US) surged 5.5 percent to $18.10. The U.S. clothing retailer said it plans to close its Martin+Osa concept, including all 28 stores and the online business. It also estimated first-quarter earnings per share excluding some items of 15 cents to 17 cents. Analysts in a Bloomberg survey had estimated it at 15 cents.
Bucyrus International Inc. (BUCY:US) advanced 3.2 percent to $67.74. The maker of mining equipment was added to Goldman Sachs Group Inc.’s “conviction buy” list.
Chevron Corp. (CVX:US): Bank of America Corp. (BAC:US) cut its price target on shares of the second-largest U.S. energy company to $90, from $95.
Citigroup Inc. (C:US) rose 2.1 percent to $3.90. The bank seeking capital after repaying bailout funds to the Treasury is selling trust preferred securities as rising investor demand drives borrowing costs to near the lowest in almost five years.
Collective Brands Inc. (PSS:US) dropped 1.8 percent to $23.55. The Kansas-based owner of footwear chains reported a fourth-quarter loss excluding some items of 18 cents a share.
Facet Biotech Corp. (FACT:US) soared 67 percent to $27.13. Abbott Laboratories (ABT:US), maker of the arthritis drug Humira, agreed to buy the biotechnology company for $27 a share, for a net transaction value of about $450 million, adding experimental medicines in cancer and immunology.
Abbott retreated 1.1 percent to $54.21.
InterMune Inc. (ITMN:US) soared 70 percent to $39.63. The maker of a treatment for a deadly lung disease that afflicts about 100,000 Americans won a U.S. panel’s backing to introduce the medicine. The Food and Drug Administration usually follows the recommendations of its advisory panels.
Medtronic Inc. (MDT:US) dropped 1.2 percent to $44.20. A Food and Drug Administration review posted on the agency’s Web site said the device maker’s deep brain stimulation therapy was tied to suicides, depression and worsening seizures in a study of epilepsy patients.
Micromet Inc. (MITI:US) sank 3.6 percent to $7.80. The drugmaker offered to sell 10 million shares of common stock.
Navistar International Corp. (NAV:US) lost 9.2 percent to $40.20. The maker of International-brand trucks reported first- quarter sales that missed estimates in a Bloomberg survey of analysts.
Fed’s ‘Extended Period’ Rate Pledge Criticized by Some on FOMC
March 10 (Bloomberg) -- The Federal Reserve’s pledge to keep interest rates close to zero for an “extended period” has come under criticism from policy makers who say it’s restricting their room to maneuver as the economy recovers.
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
The Fed presidents have said the phrase, repeated every meeting since March 2009, might reduce the central bank’s flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind. Their doubts increase the chances the language will be tweaked when policy makers next meet on March 16, said New York University economist Mark Gertler.
“Some on the committee may be concerned that the ‘extended period’ language creates the perception that the Fed will refrain from raising interest rates well beyond the time that economic conditions begin to justify an increase,” said Gertler, who co-wrote research with Fed Chairman Ben S. Bernanke.
Officials may be “getting ready to take the scissors out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Evans’ Speech
Chicago Fed President Charles Evans omitted the phrase from a speech yesterday in Arlington, Virginia, instead saying rates would stay low for “some time.” He told reporters afterward that the change didn’t signal doubts about the “extended period” phrase.
Evans said that to him, the “extended period” phrase means three to four FOMC meetings. The FOMC schedules eight meetings a year.
Robert Eisenbeis, former Atlanta Fed research director, said the Fed presidents may not convince the rest of the rate- setting Federal Open Market Committee to alter the wording.
Bernanke has signaled the phrase will be retained in next week’s statement by repeating the pledge Feb. 24-25 in semiannual testimony to Congress, Eisenbeis said.
“The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” said the 56- year-old Fed chief, a Republican who won Senate approval in January for a second four-year term.
‘Exceptionally Low’
The Fed adopted the wording three months after cutting its benchmark interest rate to a record in December 2008, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
In November, the FOMC added that its commitment depends on when the labor market, inflation and price expectations pick up.
The job market has since shown signs of stabilizing. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October.
The U.S. may add as many as 300,000 jobs this month, the most in four years, David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in an interview yesterday.
The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Most indicators suggest that inflation likely will be subdued for some time,” Bernanke said last month.
Market Rates
Two-year Treasury notes yielded 0.87 percent yesterday, compared with 4.67 percent three years ago. The yield on 10-year Treasuries was 3.7 percent, down from 4.59 percent in March 2007.
Bullard, 49, told reporters last week he was “a little less patient” with repeating “extended period,” though he didn’t plan to dissent. He said the phrase may appear to lock in a time frame for action, whereas the FOMC plans to react to economic conditions as they develop.
“I would hope we would get the committee to think about some different language that would convey the state-contingency that I would like to convey, and I think most people on the committee would like to convey,” he said March 4 in St. Cloud, Minnesota.
Plosser, 61, said Feb. 17 that he had “some sympathy” for Hoenig’s dissent. “That forward guidance has gotten us in a box,” he told reporters in Philadelphia.
Fisher, 60, said Feb. 10 in Dallas that “I have never been comfortable with that language.”
Voting Members
Hoenig and Bullard vote on FOMC decisions this year. The other presidents with a 2010 vote are Cleveland’s Sandra Pianalto and Boston’s Eric Rosengren. New York Fed President William Dudley has a permanent vote, as do the Fed’s Washington- based governors.
The debate echoes discussions in 2003 and 2004, when officials cut the benchmark federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.”
An informal tally by then-Chairman Alan Greenspan at the August 2003 meeting showed seven of 18 policy makers objected to the phrase. It was jettisoned the following January, when the FOMC said it “can be patient in removing its policy accommodation.”
The Fed will provide transcripts of the 2004 meetings in coming months, based on historical release dates.
“The longer you use the phrase, the more it hardens and the more drama is associated with changing” it, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who helped write the FOMC statements as the Fed’s monetary-affairs director from 2001 to 2007.
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
The Fed presidents have said the phrase, repeated every meeting since March 2009, might reduce the central bank’s flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind. Their doubts increase the chances the language will be tweaked when policy makers next meet on March 16, said New York University economist Mark Gertler.
“Some on the committee may be concerned that the ‘extended period’ language creates the perception that the Fed will refrain from raising interest rates well beyond the time that economic conditions begin to justify an increase,” said Gertler, who co-wrote research with Fed Chairman Ben S. Bernanke.
Officials may be “getting ready to take the scissors out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Evans’ Speech
Chicago Fed President Charles Evans omitted the phrase from a speech yesterday in Arlington, Virginia, instead saying rates would stay low for “some time.” He told reporters afterward that the change didn’t signal doubts about the “extended period” phrase.
Evans said that to him, the “extended period” phrase means three to four FOMC meetings. The FOMC schedules eight meetings a year.
Robert Eisenbeis, former Atlanta Fed research director, said the Fed presidents may not convince the rest of the rate- setting Federal Open Market Committee to alter the wording.
Bernanke has signaled the phrase will be retained in next week’s statement by repeating the pledge Feb. 24-25 in semiannual testimony to Congress, Eisenbeis said.
“The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” said the 56- year-old Fed chief, a Republican who won Senate approval in January for a second four-year term.
‘Exceptionally Low’
The Fed adopted the wording three months after cutting its benchmark interest rate to a record in December 2008, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
In November, the FOMC added that its commitment depends on when the labor market, inflation and price expectations pick up.
The job market has since shown signs of stabilizing. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October.
The U.S. may add as many as 300,000 jobs this month, the most in four years, David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in an interview yesterday.
The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Most indicators suggest that inflation likely will be subdued for some time,” Bernanke said last month.
Market Rates
Two-year Treasury notes yielded 0.87 percent yesterday, compared with 4.67 percent three years ago. The yield on 10-year Treasuries was 3.7 percent, down from 4.59 percent in March 2007.
Bullard, 49, told reporters last week he was “a little less patient” with repeating “extended period,” though he didn’t plan to dissent. He said the phrase may appear to lock in a time frame for action, whereas the FOMC plans to react to economic conditions as they develop.
“I would hope we would get the committee to think about some different language that would convey the state-contingency that I would like to convey, and I think most people on the committee would like to convey,” he said March 4 in St. Cloud, Minnesota.
Plosser, 61, said Feb. 17 that he had “some sympathy” for Hoenig’s dissent. “That forward guidance has gotten us in a box,” he told reporters in Philadelphia.
Fisher, 60, said Feb. 10 in Dallas that “I have never been comfortable with that language.”
Voting Members
Hoenig and Bullard vote on FOMC decisions this year. The other presidents with a 2010 vote are Cleveland’s Sandra Pianalto and Boston’s Eric Rosengren. New York Fed President William Dudley has a permanent vote, as do the Fed’s Washington- based governors.
The debate echoes discussions in 2003 and 2004, when officials cut the benchmark federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.”
An informal tally by then-Chairman Alan Greenspan at the August 2003 meeting showed seven of 18 policy makers objected to the phrase. It was jettisoned the following January, when the FOMC said it “can be patient in removing its policy accommodation.”
The Fed will provide transcripts of the 2004 meetings in coming months, based on historical release dates.
“The longer you use the phrase, the more it hardens and the more drama is associated with changing” it, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who helped write the FOMC statements as the Fed’s monetary-affairs director from 2001 to 2007.
Subscribe to:
Posts (Atom)
Posts
