Finance news. My opinion.

India’s economic growth accelerated for the first time since 2007, indicating the global recession’s impact on Asia’s third-largest economy is waning.

Gross domestic product expanded 6.1 percent last quarter from a year earlier after a 5.8 percent rise in the previous quarter, the Central Statistical Organisation said in New Delhi today. Economists forecast a 6.2 percent gain.

India joins China, Japan and Indonesia in rebounding as Asian economies benefits from more than $950 billion of stimulus spending and lower borrowing costs. India’s recovery may stall as drought threatens to reduce harvests and spur food inflation, making it harder for the central bank to judge when to raise interest rates.

“The weak monsoon has complicated the situation for the central bank,” said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. “Poor rains will hurt growth and stoke inflationary pressures as well.”

India’s benchmark Sensitive stock index maintained its declines today, dropping 1 percent to 15755.33 in Mumbai at 11:12 a.m. local time. The yield on the key 7-year government bond held at a nine-month high of 7.43 percent, while the rupee was little changed at 48.86 per dollar.

Before the rains turned scanty, the Reserve Bank of India on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003. It also raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.95 percent in the week to Aug. 15.

‘Recovery Impulses’

The central bank’s Aug. 27 annual report said withdrawing the cheap money available in the economy would heighten the risk of weakening “recovery impulses,” while sustaining inexpensive credit for too long “can only increase inflation in the future.”

As the global recession hit India, the central bank injected about 5.6 trillion rupees ($115 billion) into the economy, which together with government fiscal stimulus amounts to more than 12 percent of GDP.

China’s economic growth accelerated to 7.9 percent last quarter from 6.1 percent in the previous three months, aided by a 4 trillion yuan ($585 billion) stimulus package and lower borrowing costs. China and India are the world’s two fastest growing major economies.

Interest Rates

The Reserve Bank of India kept its benchmark reverse repurchase rate unchanged at 3.25 percent in its last monetary policy statement on July 28 and signaled an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October. The next policy meeting is scheduled for Oct. 27.

Manufacturing in India rebounded to 3.4 percent growth in the quarter ended June 30 after shrinking 1.4 percent in the previous three months. Mining rose 7.9 percent compared with 1.6 percent while electricity growth almost doubled to 6.2 percent during the period, today’s statement said.

India’s move to a higher growth trajectory is on course, Ashok Chawla, the top bureaucrat in the finance ministry, told reporters in Mumbai.

Drought or drought-like conditions has been declared in 278 districts in India, or 44 percent of the nation’s total, as rainfall has been 25 percent below average so far in the four- month monsoon season that started June 1, the farm ministry said Aug. 27.

Harvests Hit

Morgan Stanley economist Chetan Ahya and Nomura Securities Co. economist Sonal Varma said the drought will trim farm production though its impact on industry and services will be limited. Services including banking and software make up 55 percent of India’s $1.2 trillion economy, while industry accounts for a quarter.

“The lagged impact of monetary and fiscal policy action, improved business confidence in view of increased political stability, and recovery in external demand should ensure that the growth acceleration is sustained,” Ahya said.

India’s industrial production in June gained 7.8 percent from a year earlier, the fastest pace in 16 months, the government said Aug. 12.

Ahya expects the economy to grow between 5.2 percent and 5.8 percent in the year to March 31. That pace of expansion is attracting overseas companies including Harley-Davidson Inc., the biggest U.S. motorcycle maker. The U.S. economy shrank at a 1 percent annual rate last quarter.

New Factories

Harley-Davidson said last week it plans to start sales in India from next year.

Steel Authority of India Ltd., the nation’s second-largest steelmaker, said this month that demand for so-called flat products, mainly used to make automobiles, is rising and increased their prices by 900 rupees, or 3.4 percent, a ton.

Volkswagen AG, Toyota Motor Corp. and other car manufacturers have announced plans to spend more than $6 billion through 2012 to build factories in India to offset slumping demand in their home markets.

“Economic growth in India is still very good,” said Jnaneswar Sen, vice president in the Indian unit of Honda Motor Co., Japan’s second-largest carmaker. Honda plans to increase production in India by 50 percent from next month in response to rising demand.

Source

Rep. Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee, said he plans legislation to restrict the Federal Reserve’s emergency lending powers and subject the central bank to a “complete audit.”

At a recent town hall meeting, Frank said the House would pass a bill to use an audit to crack open the central bank’s books more widely, but in a way that will not encroach on the central bank’s monetary policy independence.

In addition, he said the House would move to rein in the authority that allows the Fed to lend to a wide range of non-bank firms in “unusual and exigent circumstances.”

A bill sponsored by Texas Republican Rep. Ron Paul that would allow the Government Accountability Office, a federal watchdog agency, to audit Fed interest-rate decisions has won the co-sponsorship of more than half of the House.

Fed Chairman Ben Bernanke has warned that the bill would compromise the U.S. central bank’s policy-making independence and could undermine financial markets and the economy.

Frank said he has been working with Paul on compromise language. “He agrees that we don’t want to have the audit appear as if it is influencing monetary policy because that would be inflationary,” Frank told constituents. A video of his remarks was posted on the popular video file-sharing website YouTube here .

Steven Adamske, a spokesman for Frank, told Reuters compromise language had not yet been written. He provided no further details. A spokesman for Paul could not be reached.

OCTOBER TARGET

Frank said the audit and emergency lending provisions would be incorporated in broader legislation to revamp U.S. financial regulation that would likely pass the House in October car loan interest rates. By seeking a compromise with Paul, Frank could strengthen the broader legislation’s chance at passage.

As chairman of the House Financial Services Committee, Frank is a key player in the effort to overhaul U.S. financial regulation.

The Obama administration has proposed giving the Fed responsibility for overseeing firms whose collapse could endanger the entire financial system. At the same time, it wants to strip the central bank of its consumer protection function, and invest that authority in a new agency.

Frank expressed unease at what he called the Fed’s power to “lend money to anybody they want” in emergency circumstances. “We are going to curtail that lending power. We are going to put some restraints on it,” he said.

Since the financial crisis struck two years, the Fed has used this emergency authority to prop up a number of non-bank financial firms with billions of dollars in loans, including insurer American International Group.

The Fed’s actions have angered many lawmakers who are concerned the central bank has put taxpayer money at risk. Fed officials have defended their actions as necessary to prevent a deeper credit crisis and widespread damage to the economy.

Bernanke, who President Barack Obama nominated this week to serve a second four-year term at the helm of the central bank, told lawmakers in July that the Fed understands the need to be accountable to taxpayers but that monetary policy decisions needed to be shielded from political interference. 

Read more

Even though financial stocks have rallied nearly 70 percent since the end of March, the Federal Deposit Insurance Corp. issued another grim quarterly report Thursday on the health of the nation’s banks.

The agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Its deposit insurance fund dropped 20 percent, to $10.4 billion, its lowest level in nearly 16 years. And the number of "problem banks" increased to 416, from 305 in the first quarter, and is expected to remain high.

Indeed, federal officials warned that while the economy and financial markets were showing signs of improvement, the banking sector was unlikely to rebound soon.

"These credit problems will at least outlast the recession by a couple of quarters," said Sheila Bair, the FDIC chairwoman. "Cleaning up balance sheets is a painful process that does take time, but it is absolutely necessary to the industry’s sustained profitability."

The dismal report shows how the industry’s problems have spread. A handful of the biggest banks were among the first to suffer big losses nearly two years ago from complex mortgage assets and other securities, but have posted strong profits from trading over the last two quarters.

Still most of the nation’s 8,195 banks primarily make their money from lending to consumers and businesses. They are now facing increased pressure from soaring loan losses and higher deposit insurance costs as the FDIC seeks to shore up the industry fund. Analysts say a recovery will not be in sight until the job market and broader economy stabilize.

So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the government’s deposit insurance fund, which is supported by fees charged to the banks regulated by the FDIC. Its second-quarter reserve of $10.4 billion compares with $45.2 billion a year earlier.

The bulk of the decline comes from additional money that the agency has set aside to cover the cost of bank failures, and Bair said the fund had ample resources to make sure insured depositors would not lose money. But the levels are so low that FDIC officials said Thursday that they would consider imposing a special assessment on the banks, on top of elevated insurance fees, toward the end of the third quarter.

Through similar actions, it added about $9.1 billion to the fund in the second quarter.

Bair said she did not anticipate having to immediately tap an emergency credit line run by the Treasury Department, although she did not rule it out. "I never say never," she said. The FDIC quarterly report came after a similar release by the Office of Thrift Supervision on Wednesday that showed savings and loan associations eked out a $4 million profit, the first time the sector posted positive results since the fall of 2007. Still, the number of "problem thrifts" rose to 40, up from 17 a year earlier.

The savings and loan industry "is not out of the woods yet," said John Bowman, the acting director of the Office of Thrift Supervision. "Despite some encouraging signs, the industry’s performance remained uneven."

Federal banking regulators are bracing for hundreds of small and medium-size banks to collapse in the coming months even though the economy has shown early signs of a recovery. Banks are burdened with billions of dollars of bad loans made over the last few years and are continuing to set aside more money to cover losses. In fact, credit loss rates reached a record high in the second quarter.

Source

German consumer confidence rose to a 15-month high as the economic recovery and falling prices boosted households’ income expectations.

GfK AG’s sentiment index for September, based on a survey of about 2,000 people, increased to 3.7 from a revised 3.4 in August, the Nuremberg-based market-research company said in a statement today. That’s the highest reading since June 2008. Economists expected the index to advance to 3.6 from the initial August estimate of 3.5, the median of 28 forecasts in a Bloomberg News survey showed.

The German economy, Europe’s largest, unexpectedly emerged from recession in the second quarter as government stimulus measures, such as a 2,500-euro ($3,557) subsidy for people who scrap an old car to buy a new one, propped up consumption. Business and investor confidence jumped this month, signaling the economic recovery may gather momentum.

“Economic pessimism is continuing to wane,” GfK said in the statement. Also, “inflation is disappearing, meaning people have more money in their pocket. This leads to rising income expectations.”

German consumer prices fell 0.7 percent in July from a year earlier, the first annual drop in more than 22 years. Oil prices have more than halved from their peak last year.

GfK’s measure of economic expectations rose to minus 7.5 from minus 14. A gauge of income expectations jumped to 8.8 from 1.8 and an index of consumers’ propensity to spend increased to 31.1 from 25.1.

The government of Chancellor Angela Merkel, who will seek a second term in office in national elections on Sept. 27, is spending about 85 billion euros ($121 billion) to revive the economy, which it predicts will contract 6 percent this year.

The Bundesbank expects unemployment to rise to 10.5 percent next year from 8.3 percent today.

GfK said further gains in consumer confidence will depend on how much the labor market deteriorates. “A strong increase in joblessness would certainly weigh on the consumer climate,” it said.

Source

Ben S. Bernanke’s renomination allows him to redefine the Federal Reserve’s mission as he expands its power over financial markets and pulls back on a credit surge the central bank used to keep the economy from collapse, economists say.

Bernanke’s agenda during the next four years will include elevating the Fed’s role in reducing excessive risk in major financial institutions, figuring out how to curtail asset bubbles, and scaling back $1.2 trillion of monetary stimulus.

“He will have the opportunity to permanently change the structure of the Federal Reserve system,” said Vincent Reinhart, a former director of the Fed’s Monetary Affairs Division who’s now a resident scholar at the American Enterprise Institute, a Washington-based research group.

President Barack Obama nominated Bernanke, 55, for a second term yesterday, lauding the Fed chairman for helping “put the brakes on our economic free fall.”

Bernanke, a former Princeton University economist, has already set in place numerous changes since he took over from Alan Greenspan in February 2006. He’s forced more cooperation between bank supervisors and staff economists and steered the Fed toward greater transparency. He’s also made his office more accessible, explaining his actions to the public on the CBS Corp. television program “60 Minutes” and at a town-hall meeting in Kansas City, Missouri.

Volcker’s Legacy

Bernanke has been a steward of former Fed Chairman Paul Volcker’s legacy of establishing a regime of low inflation. His own imprint will be different, however, because he will help make explicit the Fed’s role in assuring financial stability, said Al Broaddus, former president of the Richmond Fed.

Volcker’s “job was to get monetary policy, the true engine of inflation, under control,” Broaddus said. Bernanke’s actions in confronting the credit crisis put the Federal Reserve’s responsibility for financial stability “in strong relief” and “cemented that unwritten mandate,” he said.

Now, the Obama administration is seeking to give the Fed an even larger mission.

The administration wants the central bank to dictate capital, liquidity and risk-management standards at the nation’s biggest financial companies. That proposal has met with congressional resistance.

The Senate Banking Committee “should carefully examine the impact of the Fed’s failures as a bank regulator, how such failures contributed to the financial crisis, and whether Chairman Bernanke’s performance as the chief regulator merits his reconfirmation,” Senator Richard Shelby of Alabama, the top Republican on the panel, said in a statement yesterday.

Ramping Up Role

Bernanke is already preparing to play a larger part in oversight, no matter how Congress rewrites the rules. Fed bank examiners are putting more emphasis on comparing the risks inside one large bank with those faced by other big lenders.

The stakes are high, said Henry Kaufman, president of Henry Kaufman & Co. in New York. Success in overhauling supervision of the financial system would mean “improved economic conditions for an extended period of time,” Kaufman said. Failure would mean a return to “continued volatility.”

The Obama plan also envisions a permanent role for Bernanke’s broadened use of the Fed as lender of last resort. The Board of Governors used emergency powers to rescue American International Group Inc., as well as markets for commercial paper, housing bonds and asset-backed securities. In the process, the Fed’s balance sheet expanded by $1.2 trillion over the past year.

‘Mondustrial Policy’

Regional Fed bank presidents and scholars are divided over the Fed’s direction. John Taylor, an economics professor at Stanford University, is concerned that emergency loans will draw the central bank into allocating credit to politically favored industries, such as housing. Taylor, a former Treasury undersecretary, calls such actions by the monetary authority “mondustrial policy.”

Some investors say such loans add to political pressure to continue extending credit to satisfy interest groups, threatening the Fed’s goal of keeping inflation low.

“What they are doing is not monetary policy,” said Axel Merk, who has moved the $352 million Merk Hard Currency Fund away from dollar assets to avoid inflation. “His credit programs are fiscal policies. They are inviting political scrutiny and jeopardizing independence. It is a very dangerous road to be on.”

‘Intense Financial Crisis’

Others praise Bernanke for averting a global meltdown.

“His biggest legacy for sure will be having designed and implemented a policy for dealing with an intense financial crisis,” said former Fed governor Laurence Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers LLC. “Here is what is amazing: It was ad hoc, yet it looks very good.”

Bernanke’s first test on inflation will be reversing the $1.2 trillion in additional Fed credit his policies created. The challenge will be to maintain the Fed’s credibility for keeping prices stable, while avoiding a premature increase in interest rates that may snuff out an emerging recovery.

The chairman devoted a section of his semiannual testimony before Congress in July to his exit strategy, saying the Fed could neutralize money in the banking system through tools such as interest on reserves, reverse repurchase agreements, or outright sales of securities.

Unemployment Peaking

Traders in federal funds futures see a rising probability of an interest rate increase in March. The federal funds rate has been in a range of zero to 0.25 percent since December.

A March rate rise would occur in the quarter when economists forecast the unemployment rate to peak at 10 percent, according to the median estimate of a Bloomberg News survey. That could add momentum to legislative proposals that would expose Fed policy-making to greater examination.

U.S. Representative Ron Paul, a Texas Republican, has written legislation that would open the Fed’s monetary policy to audits. The measure has 282 co-sponsors in the House, according to Paul’s Web site.

The timing of any tightening move is “is going to be very tricky,” said Julia Coronado, senior economist at BNP Paribas in New York and a former member of the Fed Board research staff.

Much of the criticism of the Fed from Congress stems from its failure to curb asset bubbles. Subprime-mortgage originations jumped to $600 billion in 2006 from $310 billion in 2003, according to estimates by Inside Mortgage Finance. Fed officials were reluctant to raise interest rates to slow down credit growth.

Siding With Greenspan

As a Fed governor in 2002, Bernanke sided with Greenspan and said “monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy.”

He is likely to maintain a preference for what regulators call “supervisory tools.” Yet he’ll also probably remain open to any solution. Even the use of interest rates is back on the table for some officials.

Janet Yellen, president of the San Francisco Fed, said in June, “In certain circumstances, the answer as to whether monetary policy should play a role may be a qualified yes.”

After an eventful four years, investors are now looking to the central bank for stability, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which manages the world’s largest bond fund, in Newport Beach, California.

“Crisis management defined Bernanke’s first term,” he said. “Markets look to Bernanke for policy continuity and, when the time comes, an eventual orderly exit from a complex set of unconventional policies.”

Source

Stocks surged Friday, with the Dow, Nasdaq and S&P 500 all ending at fresh 2009 highs, after Fed chief Ben Bernanke said the economy is near a recovery and existing home sales posted their biggest jump in two years.

The Dow Jones industrial average (INDU) gained 156 points, or 1.7%, closing at the highest point since Nov. 4. The S&P 500 (SPX) index added 19 points, or 1.9%, closing at the highest point since Oct. 6.

The Nasdaq composite (COMP) rose 31 points, or 1.6%, ending at the highest point since Oct. 1.

Stocks have managed to rally in the last week, despite light trading volume and some worries about the impact of a potential economic slowdown in China. The advance got an additional leg up Friday after the economic news.

In particular, investors welcomed a report that showed existing home sales jumped for the fourth month in a row, rising well beyond forecasts.

"It was basically the highest level in two years and higher even than a year ago before the whole financial crisis, pre-Lehman," said Stuart Hoffman, chief economist at PNC Financial Services Group.

He said it is notable that economic indicators seem to be getting back to levels prior to last September, when the collapse of Lehman Bros. exacerbated an already brewing financial market meltdown.

"The report is basically telling us that the housing market has hit bottom," Hoffman said.

Gains were broad-based, with 29 of 30 Dow shares rising, led by Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500), Boeing (BA, Fortune 500), United Technologies (UTX, Fortune 500), IBM (IBM, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Caterpillar (CAT, Fortune 500) and 3M (MMM, Fortune 500).

Since hitting a more than 12-year low in early March, the S&P 500 has gained more than 50% as investors have moved out of panic mode and into a sense of cautious optimism.

That optimism is likely to sustain gains in the short term, as it enables investors to draw more cash out of money market funds and put it to work in riskier assets, said Mark Travis, president and CEO of Intrepid Capital Funds.

"We’ve had an awfully nice run since March and there’s still enough skepticism to keep us moving higher," Travis said. "Having said that, prices are not as attractive as they were in March and historically, there’s often a bigger selloff."

Housing: Sales of existing homes spiked 7.2% in July versus June and 5% versus a year ago.

Existing home sales for July rose at a 5.24 million unit annualized rate from a 4.89 million unit annualized rate in June, the fastest monthly pace in two years. Economists surveyed by Briefing.com expected sales to rise at a 5.1 million unit annual rate.

In other economic news, the number of states showing a drop in the unemployment rate tripled in July from June levels, according to a government report released Friday.

Bernanke: The Fed chief said the U.S. economy is on the cusp of a recovery, speaking at the Kansas City Fed Economic Symposium in Jackson Hole, Wyo. Bernanke said that the pace of the recovery will be slow and that unemployment will remain high.

Hoffman said the speech showed the significance of the coordinated actions taken by the Fed and Treasury and central banks around the world to stem the financial meltdown.

"The recovery is going to be moderate, but without all the actions taken over the last year, I don’t think we’d be talking about the economy stabilizing right now," he said. "We’d be talking about how the recession has no end in sight."

Company news: Gap (GPS, Fortune 500) reported higher quarterly earnings that topped forecasts in a report released late Thursday. But the clothing retailer also said sales fell from a year ago. Shares gained 3%.

Market breadth was positive and trading volume was light. On the New York Stock Exchange, winners beat losers by four to one on volume of 1.48 billion shares. On the Nasdaq, advancers topped decliners by over two to one on volume of 2.28 billion shares.

World markets: In overseas trading, European markets gained. Asian shares ended mixed, with the Chinese market higher and the Japanese market lower.

Oil: U.S. light crude oil for October delivery settled up 98 cents to $73.89 a barrel on the New York Mercantile Exchange, a 10-month high.

Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.57% from 3.42% Thursday. Treasury prices and yields move in opposite directions.

Other markets: COMEX gold for December delivery rose $13.50 to $955.20 an ounce.

In currency trading, the dollar fell versus the euro and gained against the Japanese yen. 

Source

The U.S. economy is at risk of dipping again after the government’s stimulus package runs out next year, Harvard University economist Martin Feldstein said.

“The economy is still weak and it’s not at all clear that the upturn that we’ve seen recently is the beginning of a sustainable rise,” Feldstein said today in an interview on Bloomberg Television in Jackson Hole, Wyoming. “There’s a serious danger that come the end of this year and the beginning of next year we will see it slipping back down again get a free credit report.”

Feldstein endorsed Federal Reserve Chairman Ben S. Bernanke for a second term at the U.S. central bank after his current term ends in January.

“He certainly deserves it. He has done a remarkably creative job of dealing with these problems,” Feldstein said. “They have kept credit going” and “the Fed has stepped in where the private markets have been absent.”

Source

Britain probably had a July budget deficit for the first time in 13 years, a month when the Treasury usually gets a boost from quarterly tax receipts.

The Treasury likely posted a shortfall of 600 million pounds ($987 million), compared with a surplus of 5.2 billion pounds a year earlier, according to the median forecast of 16 economists surveyed by Bloomberg News. The government statistics agency is due to release the data at 9:30 a.m. in London today.

“July is normally a fat month, but not this time,” said David Page, an economist at Investec Securities in London. In 2008, July accounted for 12 percent of total tax payments.

The worst recession in at least a generation has ravaged revenue and driven up jobless-benefit payments. Prime Minister Gordon Brown said in April his government expects to sell a record 220 billion pounds of debt in the fiscal year, prompting Standard & Poor’s to warn that Britain may lose its AAA rating.

The Treasury forecast a deficit of 175 billion pounds in the year through March 2010, or 12.4 percent of gross domestic product. In the first three months of the fiscal year, which began in April, the shortfall was 41.2 billion pounds, double the gap a year earlier.

Including the liabilities of banks now controlled by the government, including Bradford & Bingley Plc and Northern Rock Plc, Britain had 798.8 billion pounds of debt in June, or 56 cheap car insurance.6 percent of GDP. That’s the biggest debt burden since 1976, when the U.K. sought an emergency loan from the International Monetary Fund.

Brown’s Austerity

Under the last Conservative administration, the deficit peaked at 7.7 percent of GDP in 1993-94 after a recession at the start of the decade. That prompted years of austerity that Brown maintained for two years when he became finance minister in the Labour government that took power in 1997.

So far this fiscal year, the Treasury has received 10 percent less revenue than a year earlier, with declines in taxes on retail sales, home transactions and the profits of financial firms. Spending curbs and higher taxes are inevitable after the next general election, which Brown must hold by June 2010, economists say.

A cash method of accounting, known as the public sector net cash requirement, may show the government had a surplus of 5.6 billion pounds last month, less than half the 14.5 billion pounds recorded in July 2008, according to the median forecast in a separate survey of nine economists.

The headline deficit figure is calculated on an accruals basis, which smoothes out payments over a period of months.

For Related News and Information:

Source

The Federal Reserve extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real- estate industry from rising defaults and falling prices.

The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.

Commercial property values have fallen 35 percent since peaking in October 2007, according to Moody’s Investors Service. The extension may help firms such as Vornado Realty Trust, which is considering the sale of commercial MBS through the TALF. Almost $165 billion of mortgages for skyscrapers, shopping malls and hotels are due this year.

While financial-market conditions “have improved considerably in recent months,” the markets for ABS and CMBS “are still impaired and seem likely to remain so for some time,” the Fed and Treasury said.

The central bank said it doesn’t intend to make other types of collateral eligible for the program, indicating officials rejected adding residential mortgage-backed securities after considering such a move for several months. The Fed didn’t rule out a future expansion.

Door Open

Policy makers also left the door open to prolonging the program beyond the new expiration dates, saying they “will consider in the future whether unusual and exigent circumstances warrant a further extension.”

While extending the TALF, the Fed is trimming or ending other emergency programs. Last week, officials decided to phase out their $300 billion of Treasury-bond purchases through the end of October. The Fed has reduced sales of Term Auction Facility loans to commercial banks by one-third and is letting a money-market lending program end in October.

In June, the Fed extended other emergency-loan programs by three months to Feb. 1.

“The Fed realizes that the markets are getting better but are not yet healthy enough to stand on their own,” said Scott Buchta, a Chicago-based strategist at Guggenheim Capital Markets LLC. The June extension for new CMBS “shows that they feel that market may take a bit longer to get up and running again,” Buchta said.

Restart Market

The Fed began the TALF in March to restart the market for securities backed by auto, credit-card and education loans. In June, the Fed expanded the program to cover as much as $100 billion in loans to support commercial mortgage-backed securities.

Under the plan, the Fed lends to investors to purchase new asset-backed securities as well as commercial real-estate debt paydayloan.

TALF loans have helped reduce borrowing costs in some markets. The gap, or spread, on top-rated securities backed by consumer loans relative to benchmark interest rates has fallen as much as 2.15 percentage points to 0.60 percentage point since the TALF started in March, JPMorgan Chase & Co. data show.

Since March, the spread on AAA debt backed by commercial real estate has plunged 7.2 percentage points to 4.6 percentage points more than U.S. Treasuries, according to Barclays Capital.

Citigroup Inc., Ford Motor Co. and JPMorgan Chase are among companies that have sold auto and credit-card debt through the TALF. Brookfield Properties Corp. is “thinking about” using the emergency program, Chief Executive Officer Richard Clark said July 29.

Shield From Losses

As of Aug. 12, the Fed’s loans under the program totaled $29.6 billion. The central bank gave the TALF an initial capacity of $200 billion, backed by $20 billion of funds from the Treasury’s Troubled Asset Relief Program to shield the Fed from losses. In February, the Fed and Treasury said the TALF could grow to as much as $1 trillion.

The commercial real-estate industry had asked for an extension of the TALF deadline, saying the program needed more time to get going. The lag time of three to four months to package loans into mortgage-backed securities means that September or October would be the effective end date if the TALF expired in December, according to Jeffrey DeBoer, president of the Real Estate Roundtable, a Washington-based trade group.

Also, 41 House members — including Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, and Carolyn Maloney, a New York Democrat who heads the Joint Economic Committee — signed a July 31 letter to Bernanke seeking a one-year extension through December 2010 and asking for a decision by mid-August.

‘Reasonable Chance’

TALF loans for older CMBS have a “reasonable chance” of being extended past March, said Aaron Bryson, an analyst at Barclays Capital in New York.

New York Fed President William Dudley said in June that “there’s a huge administrative hurdle” to expanding TALF to cover residential MBS because each security is different and must be separately evaluated for the size of the haircut that should be applied. The haircut is how much capital investors put up for the Fed loan.

Separately, the Fed is buying as much as $1.25 trillion of residential MBS this year to lower interest rates in housing.

Source

The worst U.S. housing slump since the Great Depression is just starting to make its mark on inflation, indicating the Federal Reserve can maintain its monetary stimulus well into 2010, economists said.

The price of renting a house or apartment, which accounts for 30 percent of the cost of living, was unchanged last month, according to the Labor Department’s report on consumer prices issued today in Washington. One measure designed to track the value of owner-occupied houses rose the least over the past 12 months since records began in 1982.

The real-estate decline that started more than three years ago is likely to keep pushing up foreclosure and vacancy rates, which are already at record levels. The glut of properties will continue to pressure rents and limit inflation, giving Fed policy makers more time to remove the $1 trillion they’ve injected into the banking system.

“The Fed keeps the spigot wide open” at least through the middle of next year and maybe into 2011, said Donald Ratajczak, chief consulting economist at Morgan Keegan Inc. in Memphis, and a former director of the Economic Forecasting Center at Georgia State University, where he won acclaim for his inflation forecasts in the 1990s.

The cost of living was unchanged in July and dropped 2.1 percent from a year earlier, the biggest 12-month decrease since 1950, today’s Labor Department report showed. Excluding food and energy costs, the so-called core consumer-price index increased 1.5 percent from July 2008, the smallest gain since February 2004.

‘New Dimension’

“There is a risk that sometime in the next few months, you could see a negative print on core CPI,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and a former Fed economist.

“The debate on the Fed will take on a whole new dimension,” Feroli said. “Now people will say, even with growth, the Fed will be a little bit leery here of deflation risks and will want to keep accommodation longer than is priced in the market.” Deflation is a persistent drop in prices that hurts the economy by making debts harder to pay and eroding corporate profits payday loans.

Rents, which make up almost 40 percent of the core CPI, have played a leading role in that deceleration. A measure known as owners-equivalent rent, an imputed value for owner-occupied homes that accounts for almost the entire category, rose 1.7 percent in the 12 months that ended in July, the smallest gain since records began almost three decades ago.

Actual home and apartment rents, the smaller category, rose 0.4 percent during the last six months, the least since August 1963.

Record Vacancies

Indications are that the pressures will intensify in coming months. Rental vacancy rates climbed to 10.6 percent in the second quarter, the highest level since record-keeping began in 1956, according to figures from the Census Bureau.

A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac figures dating to January 2005, the Irvine, California-based company said.

Fed policy makers who met in Washington this week said that excess capacity would probably keep inflation “subdued for some time.” Investors are betting central bankers will start raising rates in the first half of 2010, according to futures trading on the Chicago Board of Trade.

Not all economists are as sanguine as the central bakers about the outlook for prices.

“It might be time to start pushing the panic button on deflation risk were it not for signs that the U.S. economy has bottomed,” David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said today in a note to clients. “We expect core inflation to level off later this year,” he said, because reductions in spare capacity are more important in determining price trends than the amount of the excess.

Source