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Old 12-16-2008, 05:58 PM   #1
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Default Fed Readies for Balance Sheet Tool as Rate Nears Zero

Fed Readies for Balance Sheet Tool as Rate Nears Zero
By Craig Torres and Steve Matthews

Dec. 16 (Bloomberg) -- The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.

“We expect the FOMC to leave the policy outlook open- ended,” said Louis Crandall, chief economist at Wrightson ICAP LLC, the world’s largest broker of trades between banks, in Jersey City, New Jersey. “The FOMC may have no choice but to muddle along for a while longer” because “there is no sign that a consensus on a new approach has begun to emerge,” he said.

Investor speculation that the Fed will ease monetary policy today pushed yields on 10-year Treasury notes to the lowest since 1954. The dollar traded near a two-month low against the euro and was close to its weakest level in 13 years versus the yen.

‘Saturday Night Massacre’

The last time the Fed detached money creation from setting interest rates was in 1979, when former Chairman Paul Volcker oversaw a violent upward move in borrowing costs. Dubbed the “Saturday Night Massacre,” the effort was aimed at reining in inflation, which exceeded 13 percent that year.

Bernanke, a scholar of the Great Depression, indicated in a Dec. 1 speech that policy makers will need to focus on “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity,” including options such as purchasing Treasuries to inject more cash into the economy.

A formal commitment to expand the balance sheet would constitute “the most extraordinary policy approach we have seen” so far, said Brian Sack, a former economist at the Fed’s Monetary Affairs Division, who is now senior economist at Macroeconomic Advisers LLC in Washington.

The FOMC, which began meeting in Washington yesterday, is expected to release its statement around 2:15 p.m. Originally scheduled as a one-day meeting, the Fed extended its gathering to two days to discuss options that go beyond lowering rates. The meeting resumed this morning at 9 a.m.

Communication ‘Challenge’

“This is really a great communications challenge,” said William Ford, a former Atlanta Fed chief who’s now at Middle Tennessee State University in Murfreesboro. “It is going to take some educational effort to elaborate on how these policy options would work” because “people don’t know how to interpret what they are talking about.”

The FOMC, which first started targeting the federal funds rate in the late 1980s, has lowered its benchmark by 4.25 percentage points since September last year. The last time it cut the rate to 1 percent, in 2003, the U.S. had already pulled out of a recession. This time, the central bank sees at least another half-year of economic contraction.

It’s unclear how specific the Fed will be in today’s statement in outlining options after exhausting rate cuts.

Bernanke has repeatedly invoked emergency powers not used to since the 1930s and expanded the Fed’s credit to the economy by $1.4 trillion.

Reducing Spreads

“The main focus of the Fed’s effort will shift to credit policies aimed at reducing credit spreads and improving the flow of funds in financial markets,” said Mark Gertler, a New York University economics professor who has collaborated with Bernanke on research.

Fed policy makers disagree over the primary cause of the credit freeze. Central bank plans to buy $200 billion in consumer and small business loans and $600 billion in mortgage-backed securities suggest they consider rates remain high on home loans and credit cards because banks are unwilling to lend.

Yet banks may instead be reacting to a decline in the credit quality of borrowers, Richmond Fed President Jeffrey Lacker said in a Nov. 19 speech.

Tumbling property values and stock prices have hammered consumers’ finances. The net worth of U.S. households fell by $2.81 trillion to $56.5 trillion in the third quarter, the biggest decline since records began in 1952, according to the Fed’s Flow of Funds report.

Bank Constraints

“My reading of current conditions is that bank lending is constrained more now by the supply of creditworthy borrowers than by the supply of bank capital,” Lacker said in his speech at the Cato Institute in Washington.

Yield premiums on asset-backed securities surged as forecasters predicted a worsening recession and the unemployment rate increased to the highest level since 1993.

Yields on AAA credit-card bonds maturing in three years rose to a record 5.75 percentage points more than the one-month London interbank offered rate this month, JPMorgan Chase & Co. data show.

“The little bit of stability we have had is because there is an impression the Fed has almost unlimited resources and has adopted a tactic of intervention,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Steve Matthews in Atlanta at 1310 or smatthews@bloomberg.net.
Last Updated: December 16, 2008 09:12 EST

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Old 12-16-2008, 06:41 PM   #2
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Default Re: Fed Readies for Balance Sheet Tool as Rate Nears Zero

Here's some more info. The Fed wraps up a two-day meeting Tuesday. Economists expect the central bank to cut the federal funds rate, already at a low of 1 percent, by another half-point in an effort to keep the recession from worsening.

Consumer prices, an inflation barometer, last month fell by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month, the Labor Department reported Tuesday.

Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947. Core inflation, excluding food and energy, was flat in November after a 0.1 percent drop in October.

Here's the link to the rest of story.....http://finance.yahoo.com/news/Inflat...-13843651.html
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Old 12-16-2008, 08:37 PM   #3
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Default Re: Fed Readies for Balance Sheet Tool as Rate Nears Zero

I see the Dow is up about 350 points today!
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Old 12-16-2008, 09:40 PM   #4
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Default Re: Fed Readies for Balance Sheet Tool as Rate Nears Zero

Hi Everybody,

Well the Fed finally did it. Burned the last bridge for Obama to try and manoeuvre when he takes posse.

Basically the Fed took 0.75% off the base rate and said it's prepared to go to 0% (on a sliding scale), which it may well have to over the New Year to try and kick the economy into some sort of shape.

Now Obamas hands are tied as there doesn't seem to be any more that he can do.

There's no, or very little money in the kitty, national debt is rife, as there's no more interest in the US, foreign investment is unlikely - even South America along with some other countries are holding a summit snubbing the US, and the US are taking it on the chin quietly.

So the scene is set for inflation, as the dolar will be needed less for international trade and so will be not as valued as it used to be. The US will need to produce internal products to generate wealth as the dolar won't cut it any more. Then the Pound will go - it's already trembling - followed by the Euro.

People are thinking about the Amero being the new recognized international currency. I think that a little smug of them. Who will have faith in the US and their allies after this economic blood bath.

I think we need to look further afield to a newer liberated country that previously was tied and blackmailed by the FMI to take the lead (the reason behind the summit in South America?) and become a new sharing the economic power world leader.

I also think that next year Obama will be used as the fall guy for the economic disaster, as G.W. will be able to say that on his watch the DOW was on the way up and nothing had actually collapsed. He will leave office and the economy will collapse around Obamas ears.

We need to remember that it was this watch that sucked the US dry and still has a lot to answer for, although frustrations will want, as they always do, an immediate 'fix' or target to vent their frustrations out.

I hope I'm wrong.

Best regards,

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