It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In a statement issued simultaneously with the discount window announcement, the FOMC indicated that the deterioration in financial market conditions and the tightening of credit since its August 7 meeting had appreciably increased the downside risks to growth. In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In a statement issued simultaneously with the discount window announcement, the FOMC indicated that the deterioration in financial market conditions and the tightening of credit since its August 7 meeting had appreciably increased the downside risks to growth. In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.
The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
Real DPI -- DPI adjusted to remove price changes -- increased 0.5 percent in July, compared with an increase of 0.2 percent in June.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in July, compared with an increase of less than 0.1 percent in June. Purchases of durable goods increased 0.5 percent, in contrast to a decrease of 1.8 percent. Purchases of nondurable goods increased 0.4 percent, compared with an increase of 0.1 percent. Purchases of services increased 0.2 percent, compared with an increase of 0.3 percent.
PCE price index -- The PCE price index increased 0.1 percent in July, compared with an increase of 0.2 percent in June. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.
Real DPI -- DPI adjusted to remove price changes -- increased 0.5 percent in July, compared with an increase of 0.2 percent in June.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in July, compared with an increase of less than 0.1 percent in June. Purchases of durable goods increased 0.5 percent, in contrast to a decrease of 1.8 percent. Purchases of nondurable goods increased 0.4 percent, compared with an increase of 0.1 percent. Purchases of services increased 0.2 percent, compared with an increase of 0.3 percent.
PCE price index -- The PCE price index increased 0.1 percent in July, compared with an increase of 0.2 percent in June. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.
The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service President Brian Clarkson said on Thursday.
The credit market is experiencing an unprecedented loss of confidence due to the lack of transparency over where exposures lie rather than underlying credit quality problems, Moody's Investors Service President Brian Clarkson said on Thursday.
Barclays Capital rescued from collapse a structured investment vehicle it helped set up last year, after other so-called "SIV-lites" it arranged were forced to wind down.
Barclays Capital, the investment-banking arm of Barclays PLC, said it will provide $1.6 billion in financing to Cairn High Grade Funding I, a vehicle of Cairn Capital, a London-based structured credit specialist that manages about $9 billion.
The funding will be used to redeem maturing commercial paper, and will stay in place until the underlying securities held by Cairn High Grade Funding mature over the next four years or so. But the bank said it has fully hedged its exposure to the underlying U.S. residential mortgage-backed securities in the Cairn portfolio.
Amid concern about Barclays's exposure to Cairn and similar vehicles, the bank on Thursday acknowledged it had borrowed £1.6 billion Wednesday from the Bank of England standing lending facility, citing a technical breakdown in the U.K. clearing system.
The financing announced Friday came as Cairn High Grade Funding teetered on the brink of collapse, having had to recently draw on $442 million in backup liquidity lines from Barclays PLC and Danske Bank after being unable to roll over maturing commercial paper. Ratings agencies Standard & Poor's Corp. and Moody's Investors Service last week said they were reviewing the vehicle's ratings for possible downgrade.
Barclays Capital rescued from collapse a structured investment vehicle it helped set up last year, after other so-called "SIV-lites" it arranged were forced to wind down.
Barclays Capital, the investment-banking arm of Barclays PLC, said it will provide $1.6 billion in financing to Cairn High Grade Funding I, a vehicle of Cairn Capital, a London-based structured credit specialist that manages about $9 billion.
The funding will be used to redeem maturing commercial paper, and will stay in place until the underlying securities held by Cairn High Grade Funding mature over the next four years or so. But the bank said it has fully hedged its exposure to the underlying U.S. residential mortgage-backed securities in the Cairn portfolio.
Amid concern about Barclays's exposure to Cairn and similar vehicles, the bank on Thursday acknowledged it had borrowed £1.6 billion Wednesday from the Bank of England standing lending facility, citing a technical breakdown in the U.K. clearing system.
The financing announced Friday came as Cairn High Grade Funding teetered on the brink of collapse, having had to recently draw on $442 million in backup liquidity lines from Barclays PLC and Danske Bank after being unable to roll over maturing commercial paper. Ratings agencies Standard & Poor's Corp. and Moody's Investors Service last week said they were reviewing the vehicle's ratings for possible downgrade.
"Jobless claims drifting up as they have is consistent with a slowdown" in GDP growth in the second half of the year, said John Silvia, chief economist at Wachovia.
The uptrend comes as mortgage-related firms slash tens of thousands of jobs amid a housing slump and credit crunch.
Housing starts have crashed 40% from their peak. But construction jobs have fallen just 1% from their cyclical high of 7.725 million reached last September.
Economists say the actual employment figure probably is much lower, partly because builders haven't reported layoffs of undocumented workers and other off-the-books personnel.
"There's a fair amount of labor in the construction industry that is not captured in the payroll survey," said Steve Cochrane, an economist at Moody's Economy.com.
Construction employment may be 160,000 below what current government data show, according to a study last month by Macroeconomic Advisers.
"There are less and less jobs every day," said Mario Lopez, lead organizer for the Cypress Park Community Job Center in Los Angeles. "It's a real problem for us."
If job losses are larger than official stats, consumer spending may face more pressure.
"Jobless claims drifting up as they have is consistent with a slowdown" in GDP growth in the second half of the year, said John Silvia, chief economist at Wachovia.
The uptrend comes as mortgage-related firms slash tens of thousands of jobs amid a housing slump and credit crunch.
Housing starts have crashed 40% from their peak. But construction jobs have fallen just 1% from their cyclical high of 7.725 million reached last September.
Economists say the actual employment figure probably is much lower, partly because builders haven't reported layoffs of undocumented workers and other off-the-books personnel.
"There's a fair amount of labor in the construction industry that is not captured in the payroll survey," said Steve Cochrane, an economist at Moody's Economy.com.
Construction employment may be 160,000 below what current government data show, according to a study last month by Macroeconomic Advisers.
"There are less and less jobs every day," said Mario Lopez, lead organizer for the Cypress Park Community Job Center in Los Angeles. "It's a real problem for us."
If job losses are larger than official stats, consumer spending may face more pressure.
The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years, as investors balked at buying short-term debt backed by mortgage assets.
Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended yesterday, the lowest since December, according to the Federal Reserve. Total short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion.
Commercial paper outstanding has fallen $244.1 billion, or 11 percent, in the past three weeks, suggesting the Fed's Aug. 17 reduction in the discount rate has yet to entice buyers back into the market. More than 20 companies and funds including Cheyne Finance and Thornburg Mortgage Co. failed to sell new paper as investors fled to safer investments.
``I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management in Greenwich, Connecticut, in an interview today. ``The market is going to overshoot itself and not lend money to people who deserve it.''
....
Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by subprime loans. Subprime loans are issued to borrowers with poor credit or high debt.
About 26 percent of asset-backed commercial paper outstanding as of July was used to fund purchases of mortgage- related securities, according to Standard & Poor's. The yield on the highest rated asset-backed paper due in a month reached a six-year high today of 6.18 percent.
The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years, as investors balked at buying short-term debt backed by mortgage assets.
Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended yesterday, the lowest since December, according to the Federal Reserve. Total short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion.
Commercial paper outstanding has fallen $244.1 billion, or 11 percent, in the past three weeks, suggesting the Fed's Aug. 17 reduction in the discount rate has yet to entice buyers back into the market. More than 20 companies and funds including Cheyne Finance and Thornburg Mortgage Co. failed to sell new paper as investors fled to safer investments.
``I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management in Greenwich, Connecticut, in an interview today. ``The market is going to overshoot itself and not lend money to people who deserve it.''
....
Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by subprime loans. Subprime loans are issued to borrowers with poor credit or high debt.
About 26 percent of asset-backed commercial paper outstanding as of July was used to fund purchases of mortgage- related securities, according to Standard & Poor's. The yield on the highest rated asset-backed paper due in a month reached a six-year high today of 6.18 percent.
Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.
Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.
The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the labor market is weakening, separate government numbers today showed claims for jobless benefits climbed to the highest level since April.
``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.
Kretzmer accurately predicted the pace of expansion.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.
Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.
Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.
The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the labor market is weakening, separate government numbers today showed claims for jobless benefits climbed to the highest level since April.
``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.
Kretzmer accurately predicted the pace of expansion.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.
On the short end of the maturity spectrum, demand remained solid as investors continued to turn away from risk and seek safety. As a result, the bond-equivalent yield on three-month T-bills fell as low as 3.91%, though it ended the session off that low at 3.984%.
Amid the dash for cash, the government's auction of $18 billion in two-year notes was nearly four times subscribed, the best level since 1988, according to Ian Lyngen, interest-rate strategist at RBS Greenwich Capital in Greenwich, Conn. Indirect bidders, domestic and foreign institutions, including foreign central banks, took 32.5% of the new two-year notes.
In fact, money market funds have seen record inflow as investors seek their safety. The Investment Company Institute said $43.67 billion went into money market funds the week ended Aug. 16. The previous week, it was $49.28 billion.
That's more than double the flow — $18.13 billion — for the week ended Aug. 1, before the subprime crisis picked up steam.
Money market funds are moving to shorter duration securities, despite the market's expectation of a decrease in the federal funds rate. Not long ago, the bias was toward a rate increase because of Federal Reserve chief Ben Bernanke's public stance that inflation was a concern.
.....
Jim McDonald, portfolio manager of taxable money market funds at T. Rowe Price, says that's odd. Ordinarily when the Fed plans to lower rates, money market funds move to longer duration securities to lock in higher yields.
But managers are so uncertain about further fallout from the subprime crisis that they are moving a chunk of their money into securities that mature the next day.
On the short end of the maturity spectrum, demand remained solid as investors continued to turn away from risk and seek safety. As a result, the bond-equivalent yield on three-month T-bills fell as low as 3.91%, though it ended the session off that low at 3.984%.
Amid the dash for cash, the government's auction of $18 billion in two-year notes was nearly four times subscribed, the best level since 1988, according to Ian Lyngen, interest-rate strategist at RBS Greenwich Capital in Greenwich, Conn. Indirect bidders, domestic and foreign institutions, including foreign central banks, took 32.5% of the new two-year notes.
In fact, money market funds have seen record inflow as investors seek their safety. The Investment Company Institute said $43.67 billion went into money market funds the week ended Aug. 16. The previous week, it was $49.28 billion.
That's more than double the flow — $18.13 billion — for the week ended Aug. 1, before the subprime crisis picked up steam.
Money market funds are moving to shorter duration securities, despite the market's expectation of a decrease in the federal funds rate. Not long ago, the bias was toward a rate increase because of Federal Reserve chief Ben Bernanke's public stance that inflation was a concern.
.....
Jim McDonald, portfolio manager of taxable money market funds at T. Rowe Price, says that's odd. Ordinarily when the Fed plans to lower rates, money market funds move to longer duration securities to lock in higher yields.
But managers are so uncertain about further fallout from the subprime crisis that they are moving a chunk of their money into securities that mature the next day.
Onward and upward remains the driving mantra heading into the final hour of trading. With all eyes on Bernanke this week ahead of his opening remarks at a Fed symposium -- a speech we don't believe will offer as clear-cut a signal about the Fed's next move as some on Wall Street are hoping (i.e. there won't be a Q&A session) -- the Fed Chairman reportedly telling Senator Schumer the Fed is ready to "act as needed" has given stocks an added boost.
Even though the letter was dated on Monday, the Fed also reiterating its commitment to ensure financial markets have adequate liquidity serves as a reminder about the surprise cut in the discount rate on August 17 that reduced the probability that the liquidity crunch would result in a recession.
Onward and upward remains the driving mantra heading into the final hour of trading. With all eyes on Bernanke this week ahead of his opening remarks at a Fed symposium -- a speech we don't believe will offer as clear-cut a signal about the Fed's next move as some on Wall Street are hoping (i.e. there won't be a Q&A session) -- the Fed Chairman reportedly telling Senator Schumer the Fed is ready to "act as needed" has given stocks an added boost.
Even though the letter was dated on Monday, the Fed also reiterating its commitment to ensure financial markets have adequate liquidity serves as a reminder about the surprise cut in the discount rate on August 17 that reduced the probability that the liquidity crunch would result in a recession.
Making sense of this mess is daunting. One good place to start: the ways various financial players indulged in layer upon layer of leverage, much of it far from transparent.
Mortgage lenders threw out common sense underwriting standards.
Wall Street sliced and diced the loans, creating the illusion that risk somehow disappeared in the process.
Hedge funds then multiplied the leverage by borrowing copiously to buy securities based on the rearranged mortgages.
In their version of the game, private equity firms used loads of debt to launch unprecedented buyouts.
Making sense of this mess is daunting. One good place to start: the ways various financial players indulged in layer upon layer of leverage, much of it far from transparent.
Mortgage lenders threw out common sense underwriting standards.
Wall Street sliced and diced the loans, creating the illusion that risk somehow disappeared in the process.
Hedge funds then multiplied the leverage by borrowing copiously to buy securities based on the rearranged mortgages.
In their version of the game, private equity firms used loads of debt to launch unprecedented buyouts.
