by Calculated Risk on 12/16/2009 05:46:00 PM

From Eric Dash at the NY Times: U.S. Said to Reconsider Quick Sale of Citigroup Stake

Two days after Citigroup moved to untangle itself from Washington, the Treasury reversed course Wednesday and backed away from plans to immediately sell a portion of its stake in the banking giant ... The decision came after Citigroup badly misread the financial markets on Wednesday and struggled to sell new shares to pay back its bailout funds.

Oops.

by Calculated Risk on 12/16/2009 05:29:00 PM

From TIME Magazine: Person of the Year 2009 Extended Interview

TIME: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

TIME: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

TIME: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.

TIME: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information. (Laughter.)

Bernanke: Thirty years fixed rate at a little over 5%.

by Calculated Risk on 12/16/2009 04:11:00 PM

First, my thanks to everyone who visits this blog. Thanks - I appreciate the feedback in the comments and via email too.

I think the most important point in the FOMC statement was that they reiterated the ending dates for the Fed facilities and MBS purchases. The Fed is giving advance warning that these facilities will expire as previously announced. It would take a major credit or economic event to change these dates at this point.

There is some concern about what will happen when the Fed stops buying agency MBS. The important thing to remember is that there will be buyers; it is just a matter of price. My guess is that mortgage rates will rise about 35 bps (maybe 50 bps) relative to the Ten Year treasury when the Fed stops buying MBS. It could be more or less, but I'm surprised by how few analysts have tried to estimate the impact.

There are some sites that think there will no buyers for agency MBS once the Fed stops the purchase program. That isn't correct; as I noted it is just a matter of price.

But this gives me an excuse to post this photo: Canaille the Cat models the proper attire when visiting those sites!

Credit: Planet Wally

The other important point in the Fed statement was the recognition that the housing sector is not as strong as it appeared in November. The wording change was small:

Dec: "The housing sector has shown some signs of improvement over recent months."

Nov: "Activity in the housing sector has increased over recent months"

As I noted this morning, existing home sales will be very strong in November (as buyers rushed to beat the initial tax credit deadline), but the indicators for residential investment have been mostly flat to weak in Q4. This includes the NAHB housing market index, housing starts, new home sales and the MBA purchase index.

Residential investment (RI) is the best leading indicator for the economy, and I expect the recovery in RI to be sluggish. In the fourth quarter GDP will be strong because of inventory restocking and stimulus spending, but my guess is 2010 will mostly be weak (I'll try to quantify this soon).

Also: I try to post data that I think is informative and useful. In that sense the blog is like a filing cabinet of economic data for me and hopefully for all the readers.

I'm going to try to post more analysis (this is a common request - and I know I've posted less analysis recently).

And finally - draw your own conclusions from the two covers below. I think Larry Summers looks as uncomfortable as the Canaille the Cat above.

Paul Krugman beat me to this: Bernanke and the cover curse

Credits (ht JA):
Person of the Year 2009: Ben Bernanke

TIME Magazine Cover: Rubin, Greenspan & Summers - Feb. 15, 1999

by Calculated Risk on 12/16/2009 02:15:00 PM

From the Fed:

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Update:

The Fed recognized that housing data is not as strong as last meeting. Last month they noted: "Activity in the housing sector has increased over recent months", now they are saying "some signs of improvement".

The Fed is also making it clear they intend to stick to their deadlines.

The Fed views the economy as stronger: "economic activity has continued to pick up and that the deterioration in the labor market is abating".

The Fed expects inflation to be subdued for some time.

by Calculated Risk on 12/16/2009 11:11:00 AM

From the BLS report on the Consumer Price Index this morning:

The index for all items less food and energy was unchanged in November after rising 0.2 percent in October. The heavily weighted index for shelter, unchanged in October, declined 0.2 percent in November. Within the shelter group, the indexes for rent and owners' equivalent rent both declined 0.1 percent and the lodging away from home index fell 1.5 percent.

Owners' equivalent rent (OER) decreased at a 1.5% annualized rate in November, and has decreased at a 1.1% annualized rate over the last three months. OER is the largest component of CPI, and helped keep core CPI unchanged in November. Median CPI from the Cleveland Fed was also unchanged.

Based on reports of falling rents - and a record high vacancy rate, OER will probably continue to fall for some time, keeping core CPI low and possibly negative next year.

Also - falling rents will push up the price-to-rent ratio, and put additional pressure on house prices.