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July 20, 2009
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7/20/2009 Market Commentary | FED Being Pressured to Keep Rates Affordable.
July 20, 2009
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Rates 7/20/2009
- 30 Year Fixed Conventional $417,000 and Below 5.25%
- 30 Year Fixed High Balance $417K to $765k 5.825%
- 5/1 Conventional ARMs at 4.00%
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Bernanke May Hold Rates Down by Showing He Can Reverse Course
2009-07-19 23:01:00.7 GMTJuly 20 (Bloomberg) — To keep interest rates at a record low, Ben S. Bernanke
may have to show Congress and investors he can be as creative about soaking up cash
from the financial system as he was when pouring it in.
The Federal Reserve chairman will probably outline his strategy for exiting
the biggest monetary expansion in history when he delivers his semiannual economic
report to Congress tomorrow. Among the options: establishing term deposits at the
Fed designed to induce banks to keep money there rather than lending it out, said
Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
Laying out a plan now may give Bernanke leeway to hold down borrowing costs
for as long as it takes to reduce unemployment from a quarter-century high. To do
that, he first has to convince lawmakers and investors he’s ready and able to
contain inflation as the economy recovers.
“Bernanke needs to explain that the Fed has the tools to do the job and that
it intends to use them forcefully when it has to,” said Lyle Gramley, senior
economic adviser with New York-based Soleil Securities Corp. and a former central
bank governor. “That would help hold down inflation expectations and give the Fed
the opportunity to stay easier for longer.”
House Financial Services Committee Chairman Barney Frank said he expects
Bernanke to spell out how the Fed will end its unprecedented expansion of credit
when he testifies before the Massachusetts Democrat’s panel tomorrow.
‘Prepared to Unwind’
“I’ve urged him to be ready to tell people how he’s prepared to unwind some of
those facilities when it’s prudent to do so,” Frank said.
Bernanke is “very conscious” of worries that the Fed may end up rekindling
inflation, the lawmaker said.
Already, some investors are betting such concerns will force Bernanke’s hand.
Trading in federal-funds futures suggests a better-than-even chance the central
bank will raise its short- term interest-rate target by January from the current
range of zero to 0.25 percent.
Laurence Meyer, another former Fed governor who’s now vice chairman of St.
Louis-based Macroeconomic Advisers LLC, said policy makers will need to keep rates
unchanged a lot longer, perhaps until late 2011, to bring down unemployment.
The Fed’s latest forecast, published July 15, projects the jobless rate will
rise to 9.8 percent to 10.1 percent next quarter, from 9.5 percent now, and will
still be 9.5 percent or higher at the end of 2010.
Fed’s Holdings
Bernanke’s purchases of assets such as mortgage bonds and Treasury securities
pumped money into the financial system in an effort to lift the economy out of its
deepest decline in half a century. That helped to more than double the Fed’s
holdings to a record $2.3 trillion in December from a year earlier. The balance
stood at $2.1 trillion last week.
Meanwhile, banks’ excess reserves at the Fed rose to a record $877.1 billion
daily average in the two weeks ended May 20, from $2 billion a year earlier. Excess
reserves — money available for lending that banks choose to leave with the Fed
instead — averaged $743.9 billion in the first two weeks of this month.
While policy makers would like credit markets to recover, they don’t want
banks to lend that cash out all at once as the economy improves, because that could
unleash inflation, said William Poole, former president of the St. Louis Fed. So
the central bank is counting on its ability to pay interest on those reserves to
help keep a lid on prices.
“Interest on reserves is an important part of the exit strategy,” Fed Vice
Chairman Donald Kohn said at a conference at Princeton University May 23.
Not So Easy
