7/3 threshold policy

Interesting take from Charles L. Evans, President and Chief Executive Officer Federal Reserve Bank of Chicago

[PRB summary: Act now, worry later…market intervention (loads of leverage) is always the correct answer.]

7/3 threshold policy

7 - I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent…

3 - Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent…

The economic conditionality in this7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low…

Conclusion: The Need for a Vibrant Economy to Cushion Risks

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. Failure to act aggressively now could lower the capacity of the economy for many years to come.

Such potential costs would come with the continuation of a subpar pace of economic recovery. The significant risks I discussed earlier – financial disruption from a worsening of the situation in Europe or a messy resolution of U.S. fiscal policy – raise the specter of an even more worrisome outcome. At the moment economic growth is not much above stall speed. Another negative shock could send the economy into recession. And if a recessionary dynamic takes hold, it would be especially difficult to regain momentum.

I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring.We are well past the threshold for additional action; we should take that action now.

yield curve movement

The bumpy ride continues….an economy transversing interest rate peaks and valleys within the new range paradigm.

Five Year Treasury Yield

further action to come?

Two questions to consider:

1) How much more ‘easing’ can we withstand?

2) How long has this been going on now? I believe we have experienced more than ‘several quarters’ of quantitative easing at this point…

Bernanke Sees More Scope for Easing to Spur U.S. Economy
By Joshua Zumbrun -Aug 24, 2012

Federal Reserve ChairmanBen S. Bernanke said the central bank has the ability to take additional steps to boost the economy.

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke said in a letter dated Aug. 22 to California Republican Darrell Issa, the chairman of the House Oversight and Government Reform Committee.

Bernanke repeated the statement from the Federal Open Market Committee’s Aug. 1 meeting that the Fed will provide “additional accommodation as needed.”He also reiterated earlier remarks to Congress that monetary policy “is not a panacea” and that other government policy makers could take steps to improve the economy.

The Fed chief said previous stimulus -- including the two rounds of quantitative easing in which the Fed purchased $2.3 trillion of securities -- have “helped to promote a stronger recovery than otherwise would have occurred, andto forestall the possibility of a slide into deflation.”

The central bank’s most recent balance-sheet program, known as Operation Twist, is “still working its way through the economic system,” Bernanke said. Under the program,the Fed is swapping $667 billion of short-term securities for longer-term debt.

“Monetary policy changes typically take several quarters to achieve their full effect on economic activity,” he said.

http://www.bloomberg.com/news/2012-08-24/bernanke-sees-further-scope-for-easing-to-spur-u-s-economy.html

Econ news tidbits...

Fannie and Freddie -

This morning’s WSJ reports that Treasury is close to amending the terms of its agreement which provides support to Fannie Mae and Freddie Mac. The amendment, according to the WSJ, would strengthen the two GSE’s financially while accelerating their balance sheet shrinkage. Reportedly, the dividend due Treasury would change from the current dividend rate of 10% to a dividend of all of their profits. Separately, the amendment may accelerate the current 10% per year balance sheet shrinkage to 15%, a change which would bring the GSE’s to their ending balance sheet cap of $250 billion in on-balance sheet assets each by 2018.

http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx

The Fed -

Comments from Fed Bank Presidents yesterday make clear the divide amongst the FOMC.

Philadelphia Fed President Charles Plosser said,“The evidence is not strong that somehow more (bond purchases) are going to help the unemployment rate move faster to where we’d like it to be.”

Kansas City Bank President Esther George questioned,“Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough?”

Minneapolis Fed President Narayana Kocherlakota speculated that the “late 2014” was too long, saying that he “would not have chosen to put that date as far out as the Committee did.” However, he also said that the Fed may be willing to let inflation be well-above its target of 2.0% in order to meaningfully bring down the unemployment rate. The Fed may have “to give a little bit on the inflation front to do better on the employment front,” he said.

http://www.reuters.com/article/2012/08/17/us-usa-fed-idUSBRE87G03120120817

a voice of one in the wilderness...

Fisher Says More Stimulus May Overburden Central Banks
By Jeff Kearns and Caroline Fairchild -Aug 8, 2012

Federal Reserve Bank of Dallas President Richard Fisher said adequate economic stimulus is in place and that global central banks may not have the capacity to undertake additional measures.

“We’re at the risk of overburdening the central banks,” Fisher said in an interview today on “Bloomberg Surveillance” withTom Keene and Sara Eisen.“We keep applying what I call monetary Ritalin to the system. We all know there’s a risk of over-prescribing.”

Fisher said the largest banks have $1.5 trillion in excess reserves that they would like to put to work and that the private sector now must take the next steps to boost growth. Lawmakers also must act to eliminate uncertainty aboutgovernment spending and tax rates, Fisher said.

“We have done our job,” Fisher said of the Fed. “We have done enough. Just doing more doesn’t solve the problem. The problem is engaging the transmission. We provided the gas, the gas tank is full.”

The Dallas Fed chief isn’t a voting member of the policy-making Federal Open Market Committee this year. He dissented last year twice against moves to push down long-term rates and to keep the benchmark U.S. interest rate near zero until at least mid-2013. He voted five times in 2008 in favor of tighter policy.

Building Permits

A bit of an upward slope!
Moving in the right direction….But it looks like a long hike out of the canyon…

Mortgage apps update

How much longer can the refi surge continue?

Mortgage applications for the week ending August 3 fell 1.8%.However, the index tracking refinances is up over 100% from this time last year.

Record low mortgage rates have spurred on another round of refinances while purchase applications have remained fairly flat.

Prepayment speeds for July were released yesterday and they increased slightly more-than-expected, particularly among lower coupon mortgage pools (stronger borrower-creditworthiness).

The Market Today ONLINE