by Calculated Risk on 8/08/2011 02:01:00 PM

There is a one day meeting of the FOMC tomorrow and no press briefing. In light of recent developments, the FOMC statement to be released around 2:15 PM ET Tuesday might be interesting.

In July, during his Congressional testimony, Fed Chairman Ben Bernanke made it clear that another round of monetary accommodation (aka QE3) would depend on both a further deteriorating in the economic outlook and the renewed threat of deflation.

Clearly the economy is weaker than the Fed's forecast in June, and there have been some initial signs of disinflation (Core PCE increased 0.1% in June or 1.3% annualized). However, based on Bernanke's comments, I think the Fed will wait for further evidence on inflation, and I think a major announcement at the meeting tomorrow is unlikely.

However the FOMC statement will change. Here are a few key sentences from the June statement:

... the economic recovery is continuing at a moderate pace ... The slower pace of the recovery reflects in part factors that are likely to be temporary ... Inflation has picked up in recent months ...

The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline ... Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. ...

... The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

"Moderate", "temporary", and "picked up" will all probably change. Growth has been worse than "moderate", and inflation has subsided - but probably not enough for QE3. Still the Fed might make some changes as suggested by Jon Hilsenrath at the WSJ: Fed Has Some Tricks Left, but None Are Magic

Since 2008, the Fed has assured the public that it wouldn't raise short-term interest rates for an "extended period," that is, at least several more months. It has been vague about plans for its vast portfolio of securities. The Fed now has a strategy—which it has disclosed—for gradually dumping the securities someday. The Fed can use its end-of-meeting statement to define "someday," perhaps saying it will hold on to those securities for an extended period, too.

So the Fed might change the "extended period" language to include maintaining the current level of security holdings for an extended period. Not a huge change. QE3 is unlikely, but not impossible - although I think the Fed will wait for further evidence of renewed deflation fears, and also try to communicate any plans in advance.

by Calculated Risk on 8/08/2011 11:21:00 AM

• Another down day for the stock market. Of course there is a flight to quality with the U.S. 10 year yield down to 2.38%.

• On Friday, S&P said they would announce thousands of downgrades based on lowering their view of the U.S. credit rating. From Reuters: S&P cuts Freddie Mac, Fannie Mae after U.S. downgrade. Any credible rating agency would have done it all at once.

• From USA Today: Obama to speak at 1 p.m. on downgrade.

Weekend:
• A long Summary for Week ending August 5th
• Mortgage Delinquencies and REOs
• Schedule for Week of August 7th

by Calculated Risk on 8/08/2011 08:34:00 AM

Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany.

The Italian spread is at 299, down from 371, and the Spanish spread is at 289 down from 387.

The European markets are in the red with the DAX down 2.3% and the FTSE down 1.6%.

From the Financial Times: ECB buys up Italian and Spanish debt

Borrowing costs for Spain and Italy tumbled on Monday as the European Central Bank intervened to buy the countries’ respective bonds ... Dealers reported that the ECB had started buying the debt as soon as European bond markets opened.
Except with permission

Weekend:
• A long Summary for Week ending August 5th
• Mortgage Delinquencies and REOs
• Schedule for Week of August 7th

by Calculated Risk on 8/07/2011 11:21:00 PM

Sunday is the new Monday ... once again!

Earlier the ECB announced a bond buying program. And the G7 put out a statement.

From the NY Times: Global Finance Leaders Take Steps to Try to Calm Markets

From the WSJ: ECB Moves to Prop Up Italy, Spain

The Asian markets are red tonight with the Nikkei down 1.3%. The Hang Seng is down over 4%, and the Shanghai down close to 5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is down about 25 points, and Dow futures are down about 230 points.

Oil: WTI futures are down sharply to $84 and Brent is down to $106.

Yesterday:
• A long Summary for Week ending August 5th
• Schedule for Week of August 7th

by Calculated Risk on 8/07/2011 08:16:00 PM

Earlier the ECB announced a bond buying program. Although there are no details, Professor Krugman argues it is worth a try since the Italian problem is different than Greece, Ireland and Portugal.

And from the G7 via the WSJ:

Statement of G7 Finance Ministers and Central Bank Governors

August 8, 2011

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.

We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.

Yesterday:
• A long Summary for Week ending August 5th
• Schedule for Week of August 7th