| Author | Message | | Alpha | | Posted: Fri Mar 20, 2009 12:40 pm Post subject: Fed move is inflation risk |
| Fed move is inflation risk
By JEANNINE AVERSA and ALAN ZIBEL The Associated Press - Published: March 20, 2009
WASHINGTON — Mortgage rates tumbled to historic lows Thursday after the Federal Reserve's sudden decision to print $1.2 trillion and pump it into the economy, a move that also triggered warning signs of inflation — a weaker dollar and the highest oil prices of the year.
The national average rate on a 30-year, fixed-rate mortgage fell to 4.94 percent, down nearly a quarter of a percentage point from a day earlier, according to financial publisher HSH Associates.
It was the first time the average had fallen below 5 percent since the publisher began keeping records in 1979. But mortgages were not exactly being passed out freely. Lenders remain extremely strict about who qualifies.
"The real story here is that the low rates are available only to solid gold borrowers," said Don Fader, a North Carolina mortgage broker who was quoting a rate just above 4.6 percent for mortgages Thursday.
The Fed announced Wednesday it would buy $750 billion in mortgage-backed securities and $300 billion in Treasury debt. It also will double its purchases of debt issued by Fannie Mae and Freddie Mac to $200 billion.
Because spending that kind of money requires the Fed essentially to print money, it meant risking inflation — and on Thursday there were early indicators that was exactly what was happening.
It cost more than $1.36 to buy a euro, more than 2 cents higher than the previous day — an unusually large leap. And the British pound gained 3 cents against the dollar.
The jump in oil prices was even more dramatic. The price of a barrel of crude oil went up nearly $3.50, or 7 percent, on the New York Mercantile Exchange, to its highest level since early December.
That doesn't mean inflation is a sure thing, by any means. In fact, most economists think high unemployment and sluggish consumer spending will keep inflation in check as businesses hold down prices in order to maintain sales.
And given the poor shape of the economy, the Fed made clear that — for now — it isn't worried about inflation. It's more concerned about falling prices, or deflation. The country's last serious bout of deflation came in the 1930s.
The move was notable for its immediacy. Seemingly at the flick of a switch, the Fed was able to train a $1.2 trillion fire hose on the economy — a sharp contrast to the slower, messier wrangling in Congress over the $787 billion stimulus plan.
"While Washington watches the economy burn, the Fed is fighting the financial fires," said economist Ethan Harris at Barclays Capital.
By snapping up Treasury securities, the Fed boosts their prices, and that drives down the yield, or interest rate. The 10-year Treasury bond dropped by the biggest one-day amount since 1981 Wednesday. It rebounded slightly Thursday.
Analysts expected mortgage rates to follow suit, and they did come down Wednesday and Thursday. But many mortgage brokers remain frustrated by the tight lending standards that make it much harder for all but the most creditworthy borrowers to qualify. Lenders already have more business than they can handle and seem reluctant to pass on lower rates.
"They're all backed up," said Douglas Braden, a broker in Fort Collins, Colo. "It's taking a lot longer to get the loans through."
Robert Gross, managing director of a financial advisory firm in Burlingame, Calif., hopes to refinance and lock in a rate as low as 4.5 percent within the next two weeks. To get ready, he provided his mortgage broker with two years of tax returns, plus copies of bank accounts, brokerage accounts and pay stubs.
"They're not taking your word for anything nowadays," he said.
The Fed move won't mean your car loans and credit cards will get any cheaper. Those are tied to short-term interest rates, and the Fed has already lowered them to nearly zero.
The deepening recession, now in its second year, is shuttering banks and other businesses and driving up home foreclosures. It has left 12.5 million people searching for work and sent unemployment to a 25-year high.
The convergence of housing, credit and financial crises — the worst since the 1930s — has clobbered the economy. By pumping $1.2 trillion into the economy, the Fed hopes to spur lending and get Americans spending again.
And even if the dollar loses value over the short term, it could bounce back once the economy starts to recover, said Jay Bryson, global economist at Wachovia.
Buying government bonds and expanding its purchases of mortgage-backed securities and debt from Fannie Mae and Freddie Mac will further swell the Fed's balance sheet. It has already mushroomed to more than $2 trillion, more than double what it was last year, and some economists think it could grow to $5 trillion.
Once the economy appears back on firm footing, Bernanke has said, the Fed is prepared to pull the extra money out by boosting its key short-term interest rate and by ending its various loan and debt-buying programs.
"At that time when the economy begins to grow again, we're going to have to shrink the balance sheet and ... we're watching that very, very carefully," Bernanke told lawmakers this month.
-----------------------------------------------------------------------------
World markets mixed on worries about US inflation
By LOUISE WATT, Associated Press Writer Louise Watt, Associated Press Writer 38 mins ago
LONDON – Stock markets were mixed Friday as investors turned cautious amid worries the U.S. Federal Reserve's latest move to combat recession in the world's largest economy will lead to rampant inflation.
By noon in mainland Europe, Britain's FTSE 100 was down 0.4 percent to 3,801.84, France's CAC 40 fell 0.4 percent to 2,765.47, while Germany's DAX rose 0.3 percent to 4,053.89.
Banking stocks, which had surged earlier in the week after the Fed announced it would start buying Treasurys to help open up tight credit markets, fell across Europe on Friday. HSBC dropped 19 percent, Barclays slipped 4.4 percent and Dexia lost 9.5 percent.
"I think some of the luster from the announcements earlier in the week has gone," said Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, referring to the Fed's move, similar measures in Britain, and proposals by UK regulators to strengthen bank oversight.
"I think some questions are being asked along the lines of 'just how much profit will be taken away from the banks.' There are still the concerns around the economic situation which continues to overhang the market," he added. "Until the employment and the housing market are sorted in the U.K. and U.S. it's going to be difficult to have any meaningful movement."
Wall Street was set to open lower. Dow Jones industrial average futures slipped 0.2 percent to 7,324. Standard & Poor's 500 index futures 0.3 percent to 777.60, while Nasdaq 100 index futures fell 0.1 percent to 1,203.25.
In Asia, trade was lackluster in most markets, with Tokyo closed for a holiday, as the region closed out one of its strongest weeks this year with a whimper.
Sentiment took a hit after Wall Street's rally petered out Thursday. U.S. investor euphoria over the central bank's aggressive $1.2 trillion plan to buy government bonds and debt securities gave way to fears the new spending could water down the dollar's worth and lead to higher prices across the board.
Those concerns have pummeled the dollar, which stabilized Friday but was still headed for a 4 percent loss against the yen this week. A weaker dollar is especially unnerving in Asia, where it hurts big exporters in Japan and other countries by eroding foreign income.
While the market may see more upside, analysts were doubtful the current rally could be sustained much longer as long as the financial system remained strained and the global economic outlook grim.
"I don't think anyone reasonably expects this to be a long-term rally or that we've hit bottom," said Andrew Orchard, Asian strategist for Royal Bank of Scotland in Hong Kong. "The problems with the financial system are still unknown."
Hong Kong's Hang Seng led the region's declines, falling 297.41 points, or 2.3 percent, to 12,833.51, and Australia's benchmark S&P/ASX 200 stock index lost 0.4 percent to 3,465.8. Taiwan's benchmark sagged 1.5 percent.
Stocks in mainland China rose for a fifth day, with the Shanghai Composite index advancing 0.7 percent to 2,281.09 as higher commodity prices lifted metal and mining stocks. For the week, the index rose 7.2 percent.
South Korea's Kospi climbed 0.8 percent Friday to 1,171.04. Markets in the Philippines and Thailand also rose. Trading will reopen in Tokyo on Monday.
Among the worst performers were financial shares, with Australian investment Macquarie Group dropping 4.5 percent. In Hong Kong, China Mobile, the world's largest carrier by subscribers, dropped 5.4 percent after its results showed slower growth.
Overnight in the New York, banking and other financial shares also dragged on the broader market, and the major indexes finished down. The Dow Jones industrial average fell 85.78, or 1.2 percent, to 7,400.80.
The broader Standard & Poor's 500 index fell 10.31, or 1.3 percent, to 784.04, while the Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.
Oil prices eased after surging overnight on a weakened dollar and evidence that OPEC has significantly slowed production. Benchmark crude for April delivery was down 74 cents at $50.87.
___
AP business writer Jeremiah Marquez in Hong Kong contributed to this report. | |  | | | ©2002-2009 WarWithoutEnd.co.uk |
