Federal Reserve: Economy Growing, Prices Rising

According to the Federal Reserve, the economy is expanding at a "modest to moderate pace." The Fed claims that retailers and manufacturers are seeing higher costs that are being passed on to consumers, and that housing continues to struggle. Tell us something we don’t already know!

CNN reports:

Both commercial and residential construction continues to be one of the slower segments of the economy, while manufacturers, retailers and financial firms reported slight growth.

Meanwhile, it's still tough to get credit, and in some regions, banks are actually tightening their standards.

The Fed reported little evidence of wages increasing in most of its districts.

The report echoes recent comments from Fed Chairman Ben Bernanke, who acknowledges rising prices are impacting the average American, but not yet at a level that will derail the recovery.

Read more here

Fed Predicts Weak Recovery for Several Years

Yesterday the Federal Reserve slashed its predictions for economic recovery, they are now projecting it could be several years before conditions improve. More than half of the central banks are warning that it could take up to six years for unemployment, and inflation to return to normal levels. Like everyone else in America, I’m left wondering if we can all stand a few more lean years.

CNN Money reports

The much weaker forecast is the major reason that policymakers decided earlier this month to announce a plan to try and jumpstart growth by pumping an additional $600 billion into the economy through the purchase of long-term bonds. That plan, known as quantitative easing, has been criticized by several economists, politicians and foreign central bank officials.

The Fed now expects the economy to grow between 2.4% to 2.5% this year, compared to an earlier forecast of growth between 3.0% and 3.5%.

The Commerce Department reported Tuesday that the economy grew at a 2.5% rate in the third quarter, up from 1.7% in the second quarter but well below the increase of 3.7% in the first three months of the year.

Read more here

Bernanke Says Federal Reserve Ready to Further Stimulate the Economy

From LATimes.com:

Federal Reserve Chairman Ben S. Bernanke on Friday laid out a case for the central bank to take further action to bolster growth, citing the risks of prolonged high unemployment and a U.S. economy slipping into a deflationary spiral.

In a much-anticipated speech in Boston, Bernanke did not spell out details of how and when the Fed would take action. But the first option that he mentioned was a program of buying additional assets, namely government bonds, in an effort to drive down long-term interest rates and stimulate economic growth.

The central bank is widely expected to announce such a program, known as quantitative easing, at the conclusion of its next policymakers' meeting on Nov. 2 and 3.

"There would appear to be a case for further action," he said at a conference sponsored by the Federal Reserve Bank of Boston.

As Bernanke spoke, the government released statistics showing the so-called core inflation rate, which excludes volatile energy and food prices, was unchanged in September and is now running at an annual rate of 0.8% — well below the Fed's informal desired target of 1.5% to 2%. Separately, there was better-than-expected news on last month's retail sales activity as total sales rose 0.6% from the prior month, boosted by higher auto sales.

Fed Considering Whether More Steps Needed to Fix Economy

From USAToday.com:

Federal Reserve policymakers are wrestling with what additional steps — if any — should be taken to strengthen the plodding economy and drive down near double-digit unemployment.

Lots of debate is expected at today's one-day meeting. But few expect any major programs to be unveiled. Instead, many will be looking to see if the Fed offers clues about the timing of any new aid and what changes in the economy would trigger such a move. A statement from the Fed is expected about 2:15 p.m. ET.

To give the Fed extra time for discussions, the meeting is scheduled to start around 8 a.m. — earlier than when it has two-day sessions.

There are differing views on the Fed's main policymaking group — the Federal Open Markets Committee — about what should be done. And some pressure is off after a few mildly positive economic reports showed the pace of layoffs has slowed, shoppers' appetites to spend has picked up and factory production is growing.

The reports have helped to ease concerns about the economy slipping back into a new recession, giving Fed Chairman Ben Bernanke and his colleagues a little breathing room.

Consumer Prices Rise, but Underlying Trend Flat

From MSN Money.com:

Underlying inflation pressures were muted in August, keeping deflation fears alive, even though a rise in food and energy costs drove overall consumer prices higher.

The core consumer price index was flat last month, the Labor Department said on Friday, defying financial market expectations of a 0.1 percent gain. The core CPI, which excludes food and energy prices, rose 0.1 percent in July.

While the report strengthened the Federal Reserve's bias toward further monetary easing, the data was not so weak that the U.S. central bank is expected to announce new steps to ease monetary policy when it meets on Tuesday to assess the economy, analysts said.

"It keeps alive the possibility that the trend could turn negative over the next year or two, but the numbers are not weak enough to encourage them to start a new purchasing program next week," said Jim O'Sullivan, chief economist at MF Global in New York.

The overall CPI rose 0.3 percent, lifted by higher food and energy costs, after a similar gain in July. August's rise was a touch above expectations of a 0.2 percent increase.

'Junk' Bonds Hit Record

From the Wall Street Journal:

U.S. companies issued risky "junk" bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

Corporate borrowers with less than investment-grade ratings sold $15.4 billion in junk bonds this week, a record total for a single week, according to data provider Dealogic. The month-to-date total, $21.1 billion, is especially high for August, typically a quiet month that has seen an average of just $6.5 billion in issuance over the past decade.

For the year, the volume of U.S. junk bonds has exceeded $155 billion, 80% higher than in the year-ago period and easily on pace to surpass the record $163.6 billion total for 2009.

Jobless Claims Rise Highlights Economy's Ills

New reports have come out that jobless claims increased again last week. The news come just days after the Federal Reserve lowered their expectations for the economy. All of this new information has experts worried about the economic recovery.

Reuters reports:

The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week to the highest level in close to six months, the latest evidence the economy's recovery is faltering.

Thursday's data came two days after the Federal Reserve spooked investors by downgrading its assessment of the economy. The increase in jobless claims added to worries in the stock market, which has failed to make any gains this year.

The number of new claims for state unemployment insurance rose by 2,000 to 484,000 in the week ended August 7, the second straight increase, the Labor Department said. Economists had expected claims to edge down to 469,000.

"This is not a good number," said John Brady, an analyst at MF Global in Chicago. "Claims are going the wrong way. That has the market concerned."

U.S. stocks closed down for a third straight day, pressured by the data and a disappointing revenue forecast from tech bellwether Cisco Systems Inc (CSCO.O).

Read more here

Fed To Keep Rates Low To Support Weak Recovery

The federal reserved resumed a two-day meeting today to discuss their optimism in the counties economic recovery, as well as fears for a possible relapse. According to Forbes.com, experts are expecting that interest rates will remain low to support the struggling economy.

The Fed resumed its two-day meeting Wednesday with policymakers having cause for optimism as well as caution. The economy has been growing again for nearly a year. Manufacturing activity is picking up. Businesses are spending more. And Fed Chairman Ben Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession.

At the same time, the recovery remains vulnerable to threats: Europe's debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment.

"The effect of European developments on the U.S. economy is likely to be modest, so we expect the tone will be cautious but certainly not dire," said Michael Feroli, economist at JPMorgan Chase (JPM - news - people ) Bank.

The Fed is certain to leave its key bank lending rate at between zero and 0.25 percent. An afternoon announcement is expected. The rate has remained at that level since December 2008.

5 Tips for Protecting Your Home from Foreclosure

Many U.S. homeowners are in foreclosure or desperately trying to prevent their home from being foreclosed upon. Maybe they have missed a couple of mortgage payments and they just aren’t sure what to do next. www.federalreserve.gov has posted five 5 tips to protect your home:

1. Don’t ignore your mortgage problem. If you are unable to pay--or haven’t paid--your mortgage, contact your lender or the company that collects your mortgage payment as soon as possible. Mortgage lenders want to work with you to resolve the problem, and you may have more options if you contact them early. Call the phone number on your monthly mortgage statement or payment coupon book. Explain your financial situation and offer to work with your lender to find the right payment solution for you. If your lender won’t talk with you, contact a housing counseling agency. You can find a list of counseling resources at NeighborWorks and on the U.S. Department of Housing and Urban Development's (HUD) website or by calling (800) 569-4287.

2. Do your homework before you talk to your lender or housing counselor. Find your original mortgage loan documents and review them. Review your income and budget. Gather information on your expenses, including food, utilities, car payment, insurance, cable, phone, and other bills. If you don’t feel comfortable talking to your lender, contact a housing or credit counseling agency. Counselors can help you examine your budget and determine the options available to you. They may also advise you about ways to work with your lender or offer to negotiate with your lender on your behalf.

3. Know your options. Some options provide short-term solutions/help, while others provide long-term or permanent solutions. You may be able to work out a temporary plan for making up missed payments, or you may be able to modify the loan terms. Sometimes, the best option may be to sell the house. For information on different options, visit HUD’s website or Foreclosure Resources for Consumers for links to local resources.

4. Stick to your plan. Protect your credit score by making timely payments. Prioritize bills and pay those that are most necessary, such as your new mortgage payment. Consider cutting optional expenses such as eating out and premium cable TV services. If your situation changes and you can no longer meet your new payment schedule, call your lender or housing counselor immediately.

5. Beware of foreclosure rescue scams. Con artists take advantage of people who have fallen behind on their mortgage payments and who face foreclosure. These con artists may even call themselves “counselors.” Your mortgage lender or a legitimate housing counselor can best help you decide which option is best for you. For tips on spotting scam artists, visit the Federal Trade Commission's website, Foreclosure Rescue Scams. Report suspicious schemes to your state and local consumer protection agencies, which you can find on the Consumer Action Website.

Please see my blog entry and video on the same topic, Other Options than Foreclosure here.

A Scramble to Finish Bank Rules This Week

President Obama is meeting with world leaders at the Group of 20 Summit this weekend in Korea. Our financial overhaul regulations need to be completed before the President’s trip and Lawmakers are scrambling to sort out their differences on a range of certain provisions. According to the Wall Street Journal, in their debate they are are discussing everything from bank regulations to consumer protection. If they don’t complete their work this week, Obama will go to the Group of 20 Summit without a bill and Congress might not be able to pass a law before their July 4th recess, which is what they have been pushing for.

One provision under debate is the Volcker Rule (originated by former Federal Reserve Chairman, Paul Volcker) which had originally imposed a ban on banks making investments with their own money—a practice called proprietary trading. Lawmakers are looking to compromise with allowing large banks to invest a small amount, like 2%, into certain privately managed funds. "Mr. Volcker wants and expects a really strong bill," said the former Fed chairman's assistant, Tony Dowd. "He doesn't want it to look like Swiss cheese."

They were also divided about how to set up stricter capital rules for banks with more than $10 billion of assets, as required by an amendment Senator Susan Collins (R., Maine) attached to the Senate bill last month. Banks are saying the new rules would restrict their ability to lend. Lawmakers on Monday did reach a deal that would limit the amount of fees banks are allowed to charge retailers for processing debit cards.

The conference committee of congressional negotiators seeking to resolve differences between the House and Senate versions of the bill plans to work through the consumer-protection issues on Tuesday, the Volcker Rule on Wednesday, and derivatives regulation on Thursday. The timing could slip if lawmakers need more time to resolve disputes. The very reason for the Summit is to discuss measures to promote the financial stability of the world—having our domestic issues worked out would sure look better for the President during the Summit.

Household Net Worth Up $1.1 Trillion In First Quarter

According to the Federal Reserve (via MSNMoney.com) the total household net worth in the country rose by $1.1 trillion in the first quarter of 2010. It increased to $54.6 trillion, which is still below the $64.4 trillion high in 2007, when the recession began.

Financial assets -- primarily stocks and mutual funds -- accounted for virtually all of the wealth increase, but the stock market has weakened in recent weeks, so those gains may be at least partially reversed in the second quarter.

The Standard & Poor's 500 index is down 8 percent since the end of the first quarter.

Americans pared debt at a 2.4 percent pace in the first quarter, the seventh consecutive quarter of declines in household borrowing. Mortgage debt dropped at a 3.8 percent rate, the biggest decline in records dating back to 1952.

Bernanke Says the Federal Debt Is ‘Unsustainable’

The chairman of the Federal Reserve, Ben S. Bernanke, offered little comfort to Democrats or Republicans on policy recommendations, the New York Times is reporting. Mr. Bernanke warned everyone on Wednesday that “the federal budget appears to be on an unsustainable path.” He did, however, recognize that the “exceptional increase” in the deficit had been necessary to ease the recession. Mr. Bernanke also was quoted in the New York Times as saying, that he felt "increased taxes, cuts in spending that are too large, would be a negative, a drag on recovery."

Basically, Mr. Bernanke was telling the House Budget Committee so that everyone will understand they need to formulate a plan. He confirmed on Monday in a question –and –answer broadcast that, he, like Congress, was waiting for the outcome of a bipartisan fiscal commission appointed by President Obama before making policy recommendations.

Read the full article here.

Greenspan Says Fed, Regulators ‘Failed’ During Financial Crisis

From Business Week.com:

Former Federal Reserve Chairman Alan Greenspan said the central bank and other U.S. regulators “failed” during the financial crisis because they became too complacent about risks.

“Even with the breakdown of private risk-management, the financial system would have held together had the second bulwark against crisis -- our regulatory system -- functioned effectively,” Greenspan said in the text of a speech at a Brookings Institution conference today. “But, under crisis pressure, it too failed.”

Greenspan echoed comments he made in a paper released yesterday citing the central bank’s failures to rein in the housing bubble and growth of the largest U.S. banks. Greenspan, 84, who ran the central bank from 1987 to 2006, said low interest rates weren’t to blame for inflating the bubble, placing the blame instead on regulators.

“Even though for years our largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still were able to take on toxic assets that brought them to their knees,” Greenspan said.

The former central bank chief said he and others at the Fed didn’t fully understand the extent of the housing bubble and its ramifications for the economy. In October 2008 testimony before Congress, he said free-market ideology may be flawed in the wake of a “once-in-a-century credit tsunami.”

Federal Reserve Makes Record $52.1bn Profit

According to BBC, last year the Federal Reserve made over $51.1 in revenue last year, allowing them to pay a record $46.1 billion to the U.S. Treasury. This number represents the largest payment made to the Treasury since 1914. It was also a massive 47% increase from the year prior. As the BBC article explains, the record figure was largely a result of the Reserve’s attempts to support financial institutions with large bail out loans.

The Federal Reserve funds itself from its own operations and returns any profits to the Treasury department.

The figures suggest that US taxpayers have, so far, gained money from the US government's action in propping up the system. Some of the profit has come from interest earned on government bonds and mortgage-related securities, including those of mortgage giants Fannie Mae and Freddie Mac.

The emergency lending programs instituted by the central bank during the last year's financial crisis helped swell the Fed’s balance sheet to more than $2tn. They were designed to keep down interest rates and get banks lending to each other again, hoping to spark an economic recovery.

The Federal Reserve could also lose money on its holdings if it sells them at a time when they have fallen in value. The Fed also earned money from its emergency loans to banks and other firms, such as the giant carmakers. It charged both interest and fees on these.

Fed to Curb Banks Overdraft Fees

The Federal Reserve made a surprising announcement today regarding bank overdraft fees, which have become a major source of profits for banking institutions. By October 2010, they will be required to have customers sign up for an overdraft program in order to charge them fees. According to ABCNews.com some banks have already begun changing their accounts, and the rest have less then a year to follow suit.

The Federal Reserve today announced new rules that will ban banks from charging overdraft fees on debit card and ATM transactions unless a consumer opts in to an overdraft program.

"The final overdraft rules represent an important step forward in consumer protection," Fed Chairman Ben Bernanke said in a statement. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Overdraft fees can result in consumers being charged up to $35 for withdrawing more money than they have in their accounts. Under the Fed's rules, all consumers -- including existing account-holders -- would have the choice to sign up for overdraft services.

Fewer Banks Tightened Lending Standards Last Quarter, Federal Reserve Says

From the Los Angeles Times:

Fewer U.S. banks tightened lending standards for companies and consumers in the third quarter as the economy grew for the first time in more than a year, a Federal Reserve survey showed.

Demand for most types of loans weakened at a smaller number of banks than in the second quarter, the Fed also said Monday in its quarterly Senior Loan Officer survey. For prime residential mortgages, a larger number of banks reported stronger demand, the central bank said.

The report helps explain why Fed policymakers last week said "tight credit" remains a drag on the economy and pledged to keep their benchmark interest rate near zero for an "extended period." JPMorgan Chase & Co. is among the banks that have reduced lending in response to stricter underwriting standards for consumer loans and lower demand from companies.

"It will be helpful if the banks were more prepared to lend, because there are creditworthy borrowers that are having difficulty getting credit," said Brian Bethune, chief financial economist at IHS Global Insight.

The survey of loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks was conducted from about Oct. 6 to Oct. 20, the central bank said. The report doesn't identify respondents.

Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.

Americans' Net Worth Shrinks $1.33 Trillion In 1Q

From BreitBart.com:

American households lost $1.33 trillion of their wealth in the first three months of the year as the recession took a bite out of stock portfolios and dragged down home prices.

The Federal Reserve reported Thursday that household net worth fell to $50.38 trillion in the January-March quarter, the lowest level since the third quarter of 2004. The first-quarter figure marked a decline of 2.6 percent, or $1.33 trillion, from the final quarter of 2008.

Net worth represents total assets such as homes and checking accounts, minus liabilities like mortgages and credit card debt.

The damage to wealth in the first quarter came from the sinking stock market. The value of Americans' stock holdings dropped 5.8 percent from the final quarter of last year.

Another hit came from falling house prices. The value of household real-estate holdings fell 2.4 percent. Collectively, homeowners had 41.4 percent equity in their homes in the first quarter. That was down from 42.9 percent in the fourth quarter.

The latest snapshot of Americans' balance sheets was contained in the Fed's quarterly report called the flow of funds.

Despite the drop, the speed at which net worth shrunk slowed to start the year. During the recession's deepest point in the October-December period, Americans' net worth fell 8.6 percent, according to revised figures.

With wealth declining and unemployment rising, there are questions about how consumers—the lifeblood of the economy—will behave in the coming months.

If they continue to spend, even at a subdued pace, the recession likely will end this year as predicted by Fed Chairman Ben Bernanke and other economists. However, if consumers hunker down and cut spending again, that could delay any recovery. In the final quarter of last year, Americans slashed spending at an annualized rate of 4.3 percent, the most in 28 years.

Still, there was some encouraging news on consumer spending Thursday.

Retail sales rose 0.5 percent in May, following two straight monthly declines, the Commerce Department reported. Meanwhile, the number of newly laid-off workers filing for unemployment benefits fell last week by 24,000 to 601,000, the lowest level since late January.