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Fed Officials Unconvinced Economy’s ‘Stabilization’ to Persist
http://www.bloomberg.com/apps/news?pid=20601087&sid=amIq7x9qsHUU&refer=home#
By Scott Lanman and Steve Matthews
May 21 (Bloomberg) -- Federal Reserve officials, who see possible signs of “stabilization” in the U.S. economy, signaled they’re not convinced those improvements will persist.
Policy makers, meeting April 28-29 in Washington, saw “
significant downside risks” to the outlook for the economy, with the global financial system still “vulnerable to further shocks,” minutes of the session released yesterday said.
The report indicates that Fed officials
may be ready to build on their plan in March to buy $300 billion of Treasuries should the economy or financial markets deteriorate further. Some policy makers said an increase “might well be warranted at some point to spur a more rapid pace of recovery” from the worst recession in five decades, the minutes showed.
“They are talking about keeping an option open in case things get worse for some reason,” said
John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress.
“But if the economy improves, they don’t need to do any more.” 
Government-bond yields declined after the report, indicating some investors expect the Fed to make additional purchases.
Yesterday’s minutes also updated economic projections from the 17 Fed policy makers, who forecast a deeper U.S. contraction than they foresaw in January, with a 9 percent unemployment rate lasting through the end of 2010.
Central bankers made their biggest cut yet to next year’s growth forecast, indicating the economy won’t rebound as quickly as previously anticipated. The jobless rate may remain as high as 8.5 percent in late 2011. The weaker forecasts are in line with changes to projections by private economists over the past few months.
‘Ebb Slowly’
“Participants generally expected that strains in credit markets and in the banking system would ebb slowly, and hence the pace of recovery would continue to be damped in 2010,” the Fed said in the minutes. Economic growth will pick up in 2011 as financial conditions improve, the Fed said.
U.S. central bankers cited a slower pace of contraction in their April statement, leaving the benchmark interest rate trading in a range of zero to 0.25 percent. They cited improved financial conditions, stronger sentiment from businesses and households and expectations of an increase in industrial production to replace inventories.
“Improvement in business activity is not far off,” Minneapolis Fed President
Gary Stern said May 19 in a speech. “Interest rates are low and financial conditions are improving,” he said. “The improvement is gradually becoming more broadly based.”
Firming Confidence
A firming in consumer confidence, industrial production and other areas of the economy indicate the recession may be easing. Output at factories, mines and utilities decreased 0.5 percent last month after dropping 1.7 percent in March, Fed figures showed last week.
That doesn’t necessarily mean policy makers are counting on continued improvement, yesterday’s report indicated.
“
As a group, they are still nervous about where we are 
,” said
William Ford, a former Atlanta Fed chief who’s now at Middle Tennessee State University in Murfreesboro. “There are a number who are still pessimistic about the outlook. Even though there is talk of green shoots, they want to see more evidence of a turnaround.”
The economy is contracting at a 1.1 percent annual pace in the second quarter, according to estimates from Macroeconomic Advisers LLC, compared with a 6.1 percent annual rate of decline in the first three months of the year.
Expanded Assets
The Fed has expanded assets on its balance sheet by $1.3 trillion over the past year to $2.2 trillion to replenish liquidity, narrow credit spreads and support borrowing and spending.
“Participants continued to see significant downside risks to the economic outlook,” the minutes said. “While financial strains and risk spreads had lessened somewhat over the intermeeting period, participants agreed that the global financial system remained vulnerable to further shocks.”
The central bank said May 19 that in July it will begin accepting commercial mortgage-backed securities issued before Jan. 1 into the Term Asset-Backed Securities Loan Facility, which provides financing to investors in asset-backed securities backed by consumer and business loans.
Yields Rise
The Fed’s securities purchase program hasn’t prevented yields on U.S. notes from rising. Ten-year Treasury yields are up from 2.53 percent March 18 when the central bank said it would buy $300 billion of government debt over six months.
Banks are still struggling with rising loan delinquencies in a variety of categories. Nearly 8 percent of residential real estate loans were delinquent in the first quarter, up from 6.3 percent in the fourth quarter, according to seasonally adjusted Fed data.
“
Meeting participants noted that the volume of credit extended to households and businesses was still contracting as a result of shrinking demand, declining credit quality, capital constraints on financial institutions, and the limited availability of financing through securitization markets 
” the minutes said.
To contact the reporter on this story:
Scott Lanman in Washington at
[email protected];
Steve Matthews in Atlanta at
[email protected].
Greenspan Says Banks Still Have a ‘Large’ Capital Requirement
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiOYLnM2WxuA&refer=home#
By Alison Fitzgerald
May 21 (Bloomberg) -- Former Federal Reserve Chairman
Alan Greenspan signaled that the financial crisis has yet to end even as borrowing costs tumble, warning that U.S. banks must raise “large” amounts of money.
“There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded,” Greenspan said in an interview yesterday in Washington. He also said that “until the price of homes flattens out we still have a very serious potential mortgage crisis.”
Greenspan’s comments suggest
he sees a bigger capital shortfall in the banking system than reflected in regulators’ stress tests on the 19 biggest U.S. lenders 
. Treasury Secretary
Timothy Geithner told lawmakers yesterday that banks have issued more than $56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion.
A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief, who left the central bank in 2006, said that the continued slump in home prices is putting at risk millions of borrowers.
“We’re on the edge and if this thing doesn’t get resolved quickly I’m worried,” he said before a meeting with House of Representatives members on financial regulation that was organized by the Washington-based Bipartisan Policy Center.
Home prices will only start to stabilize once the “liquidation” rate of single-family homes has peaked, he said. “I don’t think we’re there yet.”
‘Remarkable’ Improvement
More broadly, “things have unquestionably improved” across the economy and financial markets, he said. “They’ve improved everywhere in the world. It’s remarkable.”
The London interbank offered rate, or Libor, for three- month dollar loans fell 3 basis points yesterday to 0.75 percent, the British Bankers’ Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.
That’s an “extraordinary improvement,” said Greenspan, who last year said that the credit crisis would be at an end once the Libor-OIS spread narrowed past 25 basis points. “Virtually all of the various credit spreads not only in the U.S. but globally have come down.”
Alan Blinder, a former Fed vice chairman, also said on Capitol Hill that “if there are no more reversals, history will judge that by May 2009 we will have passed the worst of the crisis.”
GDP Call
“My current guess would be in terms of GDP the second quarter will be a bottom and by the third quarter we’re eking out a positive,” Blinder said.
Greenspan agreed, estimating that U.S. gross domestic product will decline at an annual rate of 1 percent in the second quarter.
Members of the Fed’s Open Market Committee who met in Washington April 28-29 saw “some signs pointing toward economic stabilization,” and some officials detected prospects for “a trough” in the housing market’s downturn, according to minutes of the meeting released yesterday in Washington.
Fed governors and district-bank presidents project that the economy will shrink 1.3 percent to 2 percent this year and grow 2 percent to 3 percent in 2010, according to median estimates released yesterday.
Greenspan separately said he opposed the creation of a “systemic risk regulator,” a concept that has been backed by the Obama administration and Fed Chairman
Ben S. Bernanke. The agency would be given an impossible task of trying to foresee crises, he said.
“If you put the power into the hands of people, very smart people, but if you ask them to do more than is possible I think they will create problems for the system,” said Greenspan, who said in congressional testimony in October that “a flaw” in his free-market ideology contributed to the “once-in-a- century” credit crisis.
The former Fed chairman also reiterated his view that the central bank’s emergency lending should be done instead through the Treasury 
.
To contact the reporter on this story:
Alison Fitzgerald in Washington at
[email protected]
che invocano il ritorno del rompiballe ditro 
