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Bernanke’s testimony

Bernanke’s Congressional testimony

Federal Reserve Board Chairman Ben Bernanke gave his semiannual testimony on the economy. I’ll make this quick, sparing you the cut-and-paste of his various comments that I usually resort to in favor of some brief comments.

–Bernanke made it clear that no interest moves, up or down, appear forthcoming. He continued to talk tough on inflation but noted the various pressures affecting the economy as increasing the downside risk to the economy. He even stated that the FOMC needs time to monitor incoming information. Sounds to me like he doesn’t want to paint, or talk, himself into a corner.

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PPI heightens inflation worries

Untitled DocumentProducer prices heighten inflation worries

The Producer Price Index, or PPI, was released this morning, and while this reading is often overshadowed by the Consumer Price Index and certainly the Fed’s favored gauge, the Personal Consumption Expenditures Index, this month it raises its own concerns.

The headline PPI was up a modest 0.2 percent in April, but that doesn’t reflect the continued surge in oil prices we’ve seen this month. In the past 12 months, the headline PPI has advanced 6.5 percent.

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Fed to release April minutes

Fed meeting minutes to be released this week

In contrast to the packed economic calendar of one week ago, this week’s economic releases will be comparatively sparse. Most notable will be Wednesday afternoon’s release of the April Fed meeting minutes. The Producer Price Index is slated for release tomorrow, but much of that thunder was stolen by last week’s Consumer Price Index. While the CPI was seen as better-than-expected, a more accurate descriptor is “not-as-bad-as-it-could-have-been.” Headline CPI was up 3.9 percent in the past 12 months and the core rate has advanced 2.3 percent in the same time period. Both are outside the bounds of what we would call “low inflation.” The Fed is aware of this, and the meeting minutes to be released this week will be parsed to gauge whether the Fed has a balanced risk assessment between inflation and economic weakness.

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Job losses 5 straight months

Job losses 5 straight months

The employment report for May was released this morning and the economy has a rather inauspicious streak going, with job losses posted every month since the beginning of the year. You might say job growth is 0-for-2008, to use the baseball parlance.

Specifically, payrolls shrunk by 49,000 jobs in May, with negative revisions to both April and March. In April, the economy shed 28,000 jobs and in March the job shrinkage is now 88,000 (revised from 20,000 and 81,000 losses, respectively). Hourly earnings increased 0.3 percent which, after inflation terms, is nada. The unemployment rate increased to 5.5 percent.

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Reader feedback continued

Monday, Jan. 28
Posted 4 p.m. Eastern

Reader feedback continued: Picking up from the earlier post, here are some additional reader e-mails about last week’s Fed rate cut and the state of the economy.

–”If you ask me if we need a rate cut, however, I say no and we should not have cut rates since September. Inflation will grow at a staggering rate after the onslaught of the interest rate cuts which will put us in a possible depression in ‘09. Add to that the price of oil/gold/silver/platinum/corn/wheat/hogs (at all-time highs) we are set to be jacked as an economy. Let me throw in another wrench of losing economic prosperity where we outsource manufacturing jobs. We are too reliant on foreign sources for our goods. We send out raw materials and import their finished goods. It is going to be the 1930s soon enough — are we too naive to realize this? What happens when unemployment reaches 6 to 8 percent in the coming years - and the jobs we have pay minimum wage - we’d have to work an hour or 2 daily just to pay for getting to work. Throw in the added price pressures on core necessities (food/energy) and we’re living in debt without the splurging on luxury items (TV, electronics, clothes).”

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Inflation to complicate the Fed’s task

Untitled DocumentInflation to complicate the Fed’s task

Maybe the sixth time will be the charm. Then again, it might ultimately create more issues than it resolves. The Fed will most certainly cut interest rates for a sixth time at Tuesday’s meeting in an effort to erase payment increases on adjustable rate mortgages, cushion the economic blow of a recession and vanquish the credit crunch.

A sixth interest rate cut, much as with the previous five, will be received with open arms by those with resetting ARMs. Homeowners with adjustable rate mortgages facing a reset in the coming months have the Fed to thank for an adjustment that will be much ado about nothing, or can in some cases even cause the payments to decline. Talk about a mulligan. Millions of homeowners will get a yearlong reprieve from a painful payment adjustment thanks to the repeated Fed moves, something that will be far more significant to far more people than any foreclosure relief plan or coalition of government and lenders.

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Job market: bad to worse

Untitled DocumentJob market goes from bad to worse

The March employment report released this morning was anything but pretty. The unemployment rate increased from 4.8 percent to 5.1 percent, which isn’t unexpected at all. But more troubling is the fact that we’ve now seen three straight months of job losses. Last month, when we were at two in a row, was enough to convince me we are currently in a recession. The news was even worse this time around.

In March, payrolls shrank by 80,000 jobs. The two preceding reports for February and January were revised lower, from 63,000 job losses in February and 22,000 job losses in January to a loss of 76,000 jobs in EACH month. So the job losses for the first two months of the year double and the initial March reading showed even more job losses.

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Fed blog: Fed cuts rates

Untitled DocumentFed cuts rates by 3/4 point

Just eight days before a regularly scheduled meeting, the Federal Open Market Committee took aggressive action, slashing short-term interest rates by three-quarters of a percentage point. The federal funds rate is now 3.5 percent, and the prime rate will subsequently decline to 6.5 percent.

In doing so today, as opposed to last week when it was a drumbeat of one poor economic release after another, the Fed will open itself to criticism of pandering to stock investors and being too far behind the curve to help the economy avert recession. Global stock indices have declined by more than 10 percent in some cases, just this week.

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Give the Fed a hand

Give the Fed a hand

The Fed keeps reaching into the bag of tricks hoping to devise something that will alleviate this credit crunch, which has become like the movie villian that refuses to die. Their creativity is commendable, and thank heavens they’re not resorting to the been-there, done-that of more emergency interest rate cuts … at least not yet. The only thing further interest rate cuts will prove effective at doing is inciting inflation. But I’ll have all next week to crow about that, as the Fed meets March 18.

Friday the Fed announced an increase in the size of its Term Auction Facilities, or TAF, to $100 billion per month. The TAF is widely credited with bringing down LIBOR rates since their announced introduction in December. The Fed also announced a repurchase agreement last Friday that would include accepting as collateral mortgage-backed securities of Fannie Mae and Freddie Mac. These were done to create liquidity in areas of the mortgage market that are currently quite liquidity starved.

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6 straight months of job losses

Jobs losses for 6 consecutive months

The monthly employment report was released this morning, uncharacteristically on a Thursday due to the holiday tomorrow. What it showed was more of the same — the economy shedding jobs. The economy remains 0-for-2008 in the job growth department, with the economy posting job losses every month thus far. That makes six consecutive months of job losses.

For June, the initial glance shows a loss of 62,000 jobs. April was revised from a loss of 28,000 jobs to a loss of 67,000 jobs and May showed a revised 62,000 job cuts, instead of the 49,000 estimated last month. During the second quarter, the economy shed over 60,000 jobs per month.

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Readers sound off on Fed’s surprise cut

Readers sound off on Fed’s surprise cut

A number of readers have responded to the Fed’s action in cutting interest rates this morning. The common themes I’m hearing from readers is that it is too little too late; that it will punish savers while rewarding irresponsible borrowers and risk reigniting excessive borrowing and inflation; and the most common question is what impact it will have on mortgage rates.

Here now is a sampling of reader e-mails, with my own comments interspersed.

“The Fed Open Markets committee is indeed acting with less foresight and discipline than it did under Alan Greenspan. The economy is nearing a state of “stagflation,” a condition from which it cannot escape through simple interest rate manipulation. The abrupt drop in interest rates will only worsen inflation, which is already accelerating. Most economists agree that the only way out of “stagflation” is action by the executive to stimulate the economy, either by spending or tax cuts.”

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Readers join the Fed fray

Untitled DocumentReaders’ Fed comments and questions

While we all wait for the FOMC announcement this afternoon, here are some of the questions and comments from readers about the Fed. Some have been edited for brevity.

“Do you think the Fed will lower interest rates due to the price of gas?”

Not a chance. If anything, those higher gasoline prices could eventually prompt a Fed rate increase, but it won’t come right away.

“Hi Greg, You say the Fed doesn’t want to throw ARM holders under the bus but they seem to have no trouble throwing savers under that same bus, running us over, backing up over us and running us over again! All the while telling us that inflation is low. Why is it that competent people always have to be shafted to help the incompetent?”

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Readers take on the economy

Untitled DocumentReaders opine on inflation and economy

Here are a couple of emails from fellow readers sounding off on the economy and inflation.

“How is it that the fed chairman thinks that raising interest rates lowers inflation? What a crock! High oil prices cause inflation. Everything you own came on a truck. Look around, do you see items that you have made, or do you see things that came to a store near you on a truck? It is time to start drilling oil in and close to America, until oil drops to $60 a barrel.”

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Time for a Fed reality check

Untitled DocumentTime for a Fed reality check

The Federal Open Market Committee meets Tuesday and Wednesday and, for the first time since last September, they won’t cut interest rates. Lately, the talk has been all about when the Fed will raise interest rates, with expectations calling for a rate hike as soon as August. But a rate hike is doubtful and that lack of a rate hike at the upcoming Fed meeting will serve as a reality check.

The prospects for Fed interest rate hikes are rooted in inflation data. The age-old recipe for combating inflation is to have the Fed raise interest rates. But this isn’t your grandfather’s inflation because it isn’t due to an overheating economy or too many dollars chasing too few goods. This brand of inflation is instead, one that is largely the Fed’s own doing and one they have little power or latitude to undo in the near future.

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Today is Fed day

Untitled DocumentToday is Fed day

The two-day Federal Open Market Committee meeting ends today, culminating in an announcement at 2:15 p.m. Eastern. Look for an interest rate cut of one-quarter percentage point and some softer language in the first paragraph of the accompanying statement to convey a “wait-and-see” approach to further Fed meetings.

The first look at Gross Domestic Product, or GDP as its called by economists and anyone that doesn’t want to type out the full name in his or her blog, was released this morning. As measured by GDP, the economy eked out a gain of 0.6 percent in after-inflation terms during the first quarter. This is the same rate that was posted in the fourth quarter, and although it will be revised twice more in the coming months, gives the Fed sufficient leeway to make a smaller quarter-point cut at this meeting and adopt a somewhat softer stance with regard to further interest rate cuts.

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Fed eyes growing inflation risk

Fed: Inflation risks have ‘increased’

The Federal Open Market Committee left rates unchanged this afternoon (no surprise) and made it quite clear that the next move, whenever it comes, is likely to be up (again, no surprise).

There were some notable changes to the Fed statement, conveying the idea that rates will eventually move up.

In April, the Fed said economic activity “remains weak” but today it was a much sunnier “continues to expand, partly reflecting some firming in household spending.” See what upward revisions to GDP will do?

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Bernanke testifies on economy and Fed actions

Bernanke testifies on economy and Fed actions

Fed Chairman Ben Bernanke was once again before the Joint Economic Committee of Congress to testify on the economic outlook. While his speech was titled “The economic outlook,” his remarks encompassed more than just the economy, but also recent Fed actions and the conditions in financial markets.

Here are some of the notable passages from Bernanke’s prepared remarks:

“However, beginning in mid-February, worsening liquidity conditions and reports of losses at the GSEs, Fannie Mae and Freddie Mac, caused the spread of agency MBS yields over the yields on comparable Treasury securities to rise sharply. Together with the increased fees imposed by the GSEs, the rise in this spread resulted in higher interest rates on conforming mortgages. More recently, agency MBS spreads and conforming mortgage rates have retraced part of this increase, and conforming mortgages continue to be readily available to households. However, for the most part, the nonconforming segment of the mortgage market continues to function poorly.”

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Is this the last Fed cut?

Monday, April 28
Posted 9 a.m. Eastern

Is this the Last Fed Cut?

The Federal Open Market Committee meets April 29-30 and by now you’re familiar with the drill — they’ll cut interest rates. But unlike recent Fed meetings that culminated with aggressive moves of the half-point and three-quarter point variety, the upcoming meeting is poised to produce a comparatively small quarter-point cut.

Exactly what will this mean to consumers? Rates for home equity lines of credit and variable rate credit cards will see further declines, though not all borrowers will benefit equally.

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Fed cuts smack savers

Fed not doing savers any favors

Ben Bernanke made it pretty clear last week that the Fed intends to cut interest rates again. A poor employment report this Friday could prompt the Fed to cut rates immediately rather than waiting until the regularly scheduled March 18 meeting. I hope it doesn’t come to that, but an overtone of weakness to this week’s economic data could bring calls from Wall Street for the Fed to do something pronto. As we’ve seen, the Fed has been willing to cave to such pressure.

In addition to Friday’s employment report, tomorrow brings the ISM Services Index. That same index ignited the recession concerns a month ago when it plunged sharply, showing a contraction in the important services sector of the economy. A similarly poor reading this month would bring out the economic boo-birds calling for the monetary policy equivalent of a quarterback change … in other words, an immediate interest rate cut.

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Interest rates dropping faster than presidential candidates

Untitled Document

Interest rates dropping faster than presidential candidates

For the second time in the past 9 days, the Fed aggressively cut interest rates. Today’s move was a half-point cut, which combined with the three-quarter point cut last week brings the fed funds rate to 3 percent, the lowest since June 2005.

After this morning’s release of the fourth-quarter GDP, which showed growth of just 0.6 percent on an annualized after-inflation basis, a half-point move seemed more than likely.

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The week’s economic calendar

Untitled DocumentTuesday, Feb. 19
Posted 6:00 p.m. Eastern

Wednesday releases highlight the week’s economic calendar

In a holiday-shortened week, all of the significant economic releases are squeezed into Wednesday. Starting bright and early at 8:30 a.m., we’ll get the Consumer Price Index, or CPI, housing starts and building permits, all for January. In the afternoon comes the Fed’s meeting minutes from the January get-together.

The Fed minutes might make for interesting reading, for geeks like me anyway, as the meeting came amid two interest rate cuts in a nine-day span. However, don’t expect any revelations, as Bernanke’s appearance before the Senate Banking Committee last week was similarly lacking in nuggets of new information.

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No bombshells from Bernanke