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Reshuffling Of Fed Members
Is the economy really in good enough shape for the Fed to start selling their $1.25 trillion of mortgage-backed securities? I don’t think so, but maybe the press doesn’t have enough else to talk about, so the Fed possibly lightning up on their balance sheet has been receiving some publicity. Federal Reserve Vice Chairman Donald Kohn declared on March 1 that he was planning to retire, and SF Federal Reserve’s Janet Yellen was immediately mentioned. But the nomination still hasn’t been made. In a story from the Washington Post, not only is that spot unresolved, but there have been two seats on the seven-member Fed board of governors that have been unfilled this year! MIT economist Peter Diamond and Maryland bank regulator Sarah Raskin have been mentioned. But unlike vacancies in the Supreme Court, open spots on the Fed don’t seem to garner many headlines in spite of the Fed determining short term interest rates, the pace of job creation and employment, even mortgage rates over the last year or two.

57 Failed Banks YTD
It’s Monday, so that means I get to write about the FDIC closing down banks. (We’re up to 57 this year compared to 140 for all of 2009.) In this case Illinois got whacked with seven banks from that state eliminated, with their mugs and t-shirts becoming collector’s items. The FDIC took over four banks in Chicago: New Century Bank, Citizens Bank & Trust, Broadway Bank, and Lincoln Park Savings. And just so the rest of the state didn’t feel left out, Amcore Bank (Rockford, IL), Peotone Bank and Trust Company (Peotone, IL), and Wheatland Bank (Naperville, IL) were shut down. MB Financial Bank agreed to acquire the deposits of both Broadway and New Century, Republic Bank (IL) assumed Citizens’ deposits, and Harris National Association (IL) agreed to acquire Amcore Bank’s deposits. Northbrook Bank and Trust Company took Lincoln Park Savings’ deposits; First Midwest Bank of Itasca agreed to assume Peotone Bank and Trust’s, while Wheaton Bank & Trust will acquire the deposits of Wheatland Bank. more…

NAR’s Proposal for Fannie/Freddie
My daughter and I went through the McDonald’s take-out window and I gave the clerk a $5 bill. Our total was $4.25, so I also handed her a quarter. She said, “You gave me too much money.” I said, “Yes I know, but this way you can just give me a dollar bill back.” She sighed and went to get the manager, who asked me to repeat my request. I did so, and he handed me back the quarter, and said, “We’re sorry but we could not do that kind of thing.” The clerk then proceeded to give me back $1 and 75 cents in change.

Numbers can really be confusing. And when you are dealing with companies that back half of the $11 trillion home loans, things become even more confusing. What would you do about the role of the agencies in the mortgage industry? The National Association of Realtors has put forth a proposal to convert Freddie & Fannie into nonprofit corporations that would largely leave the mortgage-finance giants intact. Of course, the NAR or anyone else just can’t snap their fingers to make this happen: the proposal is likely to meet stiff political resistance because of the bail out money already spent and Congress’s desire to make bold changes. NAR suggests that unlike a federal agency, the new government non-profit authorities will function as self-sustaining organizations, without needing annual appropriations from Congress and without a profit motive but with government backing and guarantees. MI companies would continue to mitigate risk on loans above 80% LTV, and MBS guarantee fees would still be paid by originators. Of course no one wants to endanger the currently fragile housing and credit markets, least of all the NAR and Congress, so look for this process to be a very long and involved one. more…

Below are our excerpts of key elements from Fed minutes from their last FOMC meeting on December 15-16. The excerpts cover the following: Fed’s view on whether economic recovery will last, support for tame inflation even with volatile energy prices, bank standards to remain tight because of commercial real estate strains, and jobless rate likely to remain near current 10% level. Perhaps most important, the Fed minutes also suggest banks could ease credit standards and also re-enter the private MBS market as economy improves. This would help ease long-term mortgage rate pressure caused by end of Fed’s MBS purchasing, but could also lead to inflation which would cause Fed to hike short rates.

Will the economic recovery continue?: more…

The Fed kept the overnight bank-to-bank Fed Funds Rate target at 0-.25% and Fed-to-bank Discount Rate at .5%. They changed their language ever so slightly about the economy from “likely to remain weak for some time” to “likely to remain weak for a time” and following that by saying they expect fiscal and monetary stimulus to eventually strengthen the economy and they’d adapt “in a context of price stability” meaning that they’d raise rates to avoid inflation as necessary. But they did keep their language that they expect inflation “will remain subdued for some time.”

The Fed mortgage bond purchase program will continue through March 31. This is the most important factor in keeping mortgage rates low because buying drives bond prices up and yields (or rates) down. For the latest on this mortgage bond buying program and what it’s doing for rates now and during early-2010, click here. And the Fed’s full statement is below. more…

The big news from today’s Fed meeting isn’t that they’re keeping overnight Fed Funds Rate the same at 0-.25% but that the mortgage bond purchase program is being extended through the first quarter of 2010. Same $1.25t target amount of purchases, but the extension gives markets more time to get used to less Fed help so mortgage rates don’t shoot up too radically as we approach the end of the year. This means two things: first, the weekly purchases by the Fed will likely decrease since the budget is the same and the timing is longer.

Second, we now have to carefully watch selling pressure in mortgage bonds as big money managers may look to trim their mortgage bond positions before the end of the Fed’s buying program—PIMCO chief Bill Gross told CNBC as much today, reiterating a stance he’s held all year. Full Fed statement below, and click the Mortgage Bonds topic link below for full weekly coverage of the Fed’s MBS purchase program: more…

Today’s FOMC announcement is below. The highlights are that they reiterated they’ll stop Treasury buying in the Fall to wean markets off this support but continue mortgage bond buying until they hit their budget of $1.25t by end of year–we cover this topic weekly, see ‘Fed Mortgage Bond Program’ articles.

FULL FED FOMC ANNOUNCEMENT
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. more…

Below is the full text of the Fed’s FOMC decision from their two-day meeting that just ended. They kept short-term Discount and Fed Funds rates the same and said that ‘inflation will remain subdued for some time’ but this is a slight change from the April statement that said ‘sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.’

We’ve gone from a borderline deflation message to a tame inflation message. But in these uncharted economic and policy waters, markets are interpreting this change as more severe than ‘subdued’. Mortgage and Treasury bonds, which hate inflation, have sold off after the announcement, pushing rates higher. The only thing that will help rates at this point is the FOMC’s reiteration of their continued mortgage and Treasury bond buying. In recent weeks since May 21 when inflation and bond supply problems started pushing bond prices lower (and rates higher), the Fed has not increased their mortgage bond buying, and in fact, they bought less last week than in any of the previous 2 months. So until they step up buying, rates will remain in their current range. more…

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. more…

Full Fed statement below following today’s FOMC meeting. They’ve more than doubled their mortgage bond buying program to drive rates down. Rates trading lower on the news.

FULL FED FOMC STATEMENT: Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. more…

The FOMC said that they will keep buying mortgage bonds according to their $500b by June schedule and also said they will keep going if necessary. They left rates alone. Mortgage bonds sold off heavily after the Fed meeting, ostensibly because they also said they’d buy long-term Treasuries as well, which contribute to already diluted yield levels. Full Fed statement below.

FOMC Policy Statement January 28
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. more…