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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


Thursday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Jan 24, 2008 - 6:40:27 AM

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The Irish Independent reports that credit unions around the country could be in line for a multi-million euro payout after the financial services ombudsman confirmed a finding against Davy Stockbrokers over disputed investment products.

Davy could now face an avalanche of claims after Joe Meade confirmed a decision of his deputy Gerry Murphy that the stockbroker should buy back controversial bonds it sold Enfield Credit Union in Meath.

The credit union complained to the ombudsman about advice it received from Davy to invest in open-ended perpetual bonds.

Some €270m of the bonds had been sold to around 148 credit unions, with total losses estimated to be €25m.

Davy began selling the bonds to the credit unions back in 2002, but they have since fallen dramatically in value.

Mr Meade would only say yesterday that a decision had been made on Monday on the issue, but would not outline his decision.

However, Davy has been told by the ombudsman to buy back the bonds, the Irish Independent understands.

Mr Meade's decision is binding on both parties but they have 21 days to appeal to the High Court.

Davy is now set to take matter to the courts.

In a statement last night the stockbroker said: "Davy notes the decision by the Financial Services Ombudsman to uphold a prior decision by his office, which we found difficult to comprehend.

"We are consulting with our legal advisers and will be lodging an appeal against the ruling in the High Court."

It is understood that Mr Meade's decision involves three perpetual bonds bought by Enfield with a total value of €500,000.

Credit unions are estimated to have lost around €25m through investments in perpetual bonds and some feel Davy should have done more to warn them about the potential downside to such investments.

However, to date, only Enfield Credit Union has pursued its case.

Other unions with larger exposure to perpetual bond losses are now likely to demand that Davy compensates them for losses.

Many of them claim they were mis-sold the bonds whose risk they did not understand and that the bonds were not suitable for credit unions.

Perpetual bonds have the capital element of them guaranteed. But because they are open-ended, with no maturity date, the market value is determined by how the coupon (rate) compares with market rates.

And because the bonds are not redeemable at a set date it has proved difficult for accountants to value the bonds on credit union balance sheets.

This has led to conflict between the credit union movement and the regulator Brendan Logue who wants the losses fully reflected in credit union books.

The Irish Independent also reports that ECB chief Jean Claude Trichet yesterday ruled out an immediate cut in lending rates in any bid to prop up ailing stock markets.

As share prices went into reverse across Europe, Trichet ignored calls for action on rates instead reaffirming his bank's commitment to the war against inflation.

But even though he has ruled out an immediate cut, economists pointed to new surveys showing a slowdown in manufacturing and service-sector growth across the single currency as evidence that the bank will have to cut rates soon.

The slowdown was blamed for a 0.5pc drop in the value of the euro against the dollar yesterday, with the single currency falling back to $1.45.

And on money markets there was a 0.5pc drop in the cost of six-month money, a clear signal that the markets believe lending rates will fall by the middle of the year.

The fall in the euro's value will bring some relief to hard-pressed exporters who have struggled to cope with the combination of rising costs and the drop in income due to a lower rate for their dollar revenues.

Whammy

This twin whammy has hurt small exporters the most as few of them can afford the luxury of either hedging their dollar earnings or postponing the conversion of dollar income until exchange rates turn in their favour.

Firms will also be cheered by the prospect of lowering borrowing rates. Indeed anyone big enough to dip into the money markets can already securing the benefit of lower rates as by yesterday afternoon the money markets were showing a 0.5pc drop in six-month wholesale lending rates.

The cut in wholesale rates reflects the huge flow of cash which has been withdrawn by investors from stock markets across the globe, leading to a boost in liquidity. But it also in part reflects a conviction that the ECB will have sanctioned a half rate cut by the end of June and even the comments from Trichet were insufficient to dispel this belief yesterday.

A Reuters poll showed 45pc of economists believed the ECB would cut rates by mid-year and 75pc saw lower rates by the year-end.Reacting to the Fed's dramatic action in cutting base rates by 0.75pc, the ECB chief ruled out the prospect that his bank would be following suit any time soon.

Trichet said that despite market turmoil, which is expected to curb growth in the 15 countries using the euro, the ECB would stick to its job of keeping price growth under control.

"In demanding times of significant market correction and turbulence, it is the responsibility of the central bank to solidly-anchor inflation expectations to avoid additional volatility in already highly-volatile markets," Trichet said.

But even that emphatic line still leaves room to manoeuvre and with five monthly meetings between now and the end of June there is plenty of scope for Trichet to act.

The Irish Times reports that the Government is expected to mount a strong lobbying campaign to try to reduce the 20 per cut in Ireland's greenhouse gas emissions proposed by the European Commission yesterday.

As Ireland has the second-highest gross domestic product (GDP) in the EU combined with a relatively poor record at meeting emissions targets, it is one of the states hit hardest by the new climate strategy which aims to make the richest countries bear the greatest burden.

The commission's proposals would require Ireland to reduce its greenhouse emissions by 20 per cent by 2020, using 2005 figures as a base. The commission has also set a target of 16 per cent of all energy in Ireland to come from renewable sources from that date.

The Government's response to the proposals was cautious and verging on the negative, though that was tempered by a more enthusiastic and welcoming reaction from the two Green Ministers. However, Government spokesmen representing the two parties were at pains to stress that Fianna Fáil and the Greens were at one on the issue.

In a detailed statement released after a meeting of the Cabinet Committee on Climate Change yesterday afternoon, Taoiseach Bertie Ahern gave strong indications that the assumptions used by the commission to arrive at the targets would be seriously challenged by the Government at EU level. Mr Ahern said the targets raised "very serious economic and social issues for Ireland". Echoing the comments of Tánaiste Brian Cowen from earlier in the week, Mr Ahern also raised concerns that the ultimate decision to impose targets on each member state arose out of a fair and transparent process.

He also revealed that he had written to commission president José Manuel Barroso on January 18th outlining these concerns. In the letter, he pointed out that because of the repatriation of profits from the substantial foreign direct investment sector in Ireland, there was a substantial difference between GDP and gross national income (GNI) in this State.

Mr Ahern also highlighted the large infrastructural deficit as it related to public transport and the population boom, as well as the large size of Irish agriculture, which accounts for 28 per cent of national greenhouse gas emissions.

The Government's statement was more positive on the renewable target of 16 per cent of all energy by 2020, saying it was broadly in line with its own national targets.

Mr Ahern's spokesman said last night that the Government was setting out its stall ahead of negotiations on the issue. He said GDP, at €175 billion, was some €25 billion higher than GNI. Agreeing that the Government may argue for a reduction on the basis of these figures, he said: "It is a figure with which we would take issue with the EU. We will present our case on this particular figure."

The Green Party spokesman said the Greens agreed that no member state should be absented from its obligations or faced with an undue burden. Dismissing any question of splits over the targets, he said: "There's no suggestion of a difference. Even if the Greens want a fight, which they do not, they would not be able to find it because this is such a new, complex and perse issue."

Minister for Energy Eamon Ryan said:"There's an opportunity in taking on this international commitment. We can improve aspects of Irish society, we can improve our economy, we can create jobs in the renewables industry and we can save money by cutting back on fossil fuels."

The Irish Times also reports that European Central Bank (ECB) president Jean-Claude Trichet played down expectations of an imminent euro zone rate cut yesterday, saying he is committed to tackling inflation. Mr Trichet was attempting to quash speculation that he will quickly follow the US Fed in cutting interest rates after stocks plunged.

"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," he told the European Parliament in Brussels yesterday.

Bond investors dismissed his comments and raised bets on an ECB interest rate cut.

The US central bank cut its benchmark by three-quarters of a percentage point to 3.5 per cent on Tuesday after global stocks tumbled on concern a recession in the world's largest economy will curb global growth.

"Europe is not going to get special dispensation from a global slowdown," Stephen Roach, of Morgan Stanley in Asia, said on a panel at the World Economic Forum in Davos, Switzerland. "Europe is not this dynamic, rapidly-growing economy."

Euro-region service industries grew this month at the slowest pace in more than four years after credit tightened and the euro neared a record, an industry report showed yesterday.

On January 10th Mr Trichet threatened to raise the bank's key rate from 4 per cent if unions push through wage increases that take inflation into account.

Euro-region inflation was 3.1 per cent in December, the fastest in six years and well above the ECB's 2 per cent limit. He suggested yesterday that slowing growth may give the ECB more room for manoeuvre.

While the bank is sticking to its base scenario that the economy of the 15 euro nations will expand about 2 per cent this year, there are "downside" risks to the outlook, Mr Trichet said.

"We'll see how the real economy develops in the future because it can have an effect on inflation," he said. That remark "suggests any cut in rates by the ECB will only come on the back of poor economic data", said James Nixon, an economist at Societe Generale in London.

The Irish Examiner reports that Irish retail sales grew at the slowest pace in more than two years in November — declining by 0.6%.

This dragged the annual rate of spending growth down to 3.9%, its lowest rate since June 2005, according to figures released by the CSO yesterday.

Motor sales played a significant part in the slump and if the 4.4% drop in motor sales — which includes sales at petrol stations — was not included, the monthly drop would have been only 0.1%.

Consumer confidence has been extremely low in recent months according to Bloxham Stockbrokers chief economist Alan McQuaid, who added that this is now being reflected in personal spending.

“Worries about job losses and a slowdown in the economy sent consumer confidence crashing to one of its lowest levels in the past decade in December, and the third lowest reading in the index’s 12-year history. Four out of five consumers now believe that job losses will rise this year,” he said.

On a three-month moving average, which smoothes out monthly volatility in the index, sales rose 5.7% in the three months between August and October from a year earlier, according to the CSO.

Ulster Bank chief economist Pat McArdle said however that retail sales in October and November were quite weak.

“This weaker performance is unsurprising, given the absence of any SSIA stimulus and the deterioration in consumer confidence that has occurred in the meantime.

“The motor trade was again a big factor. It has a high weighting in total spending and sales were very weak in November,”
he said.

A breakdown of the figures showed a 5.3% decline in bar sales compared with the previous month but sales in department stores and hardware, paints and glass categories rose by 3.8% and 5.2% respectively.

The Financial Times reports that France is planning to freeze public spending for five years under its biggest programme of social and economic reform since the late 1960s, according to François Fillon, the prime minister.

In an interview with the Financial Times, his first with a foreign newspaper since being appointed by President Nicolas Sarkozy in May last year, Mr Fillon signalled his intention to get serious about restoring French public finances to health.

Mr Fillon will today take his message that France is “changing profoundly” to the World Economic Forum in Davos, the first time a French prime minister has addressed the gathering in more than 25 years.

He told the FT: “The idea is straightforward: we want to freeze public spending for five years.”

The government has said it wants to eliminate its deficit and reduce spending as a share of national output – the highest in the EU at 53.5 per cent – during Mr Sarkozy’s first five-year term, but it has said little about how, to the frustration of its eurozone partners. It has also avoided any hint of austerity measures.

Mr Fillon did not say whether he was planning a real-terms or nominal freeze, nor whether it would encompass France’s indebted social insurance system.

He admitted that France would only eliminate its deficit “if we do the underlying structural reforms, which would allow us to reduce in a much more significant way public-sector employment and public spending”.

Mr Fillon said the market turmoil and a global downturn would only “reinforce the government’s determination to move swiftly and far with structural reforms”.

He defended the independence of the European Central Bank but implied it should follow the US Federal Reserve and cut rates. “It has the same worries as the Fed and will be wanting to take action,” he said.

Mr Fillon welcomed the far-reaching proposals to liberalise the French economy published yesterday by a commission chaired by Jacques Attali, the economist and former Socialist government adviser.

The commission produced 316 proposals to inject more competition into retailing and other services, cut labour costs and streamline the state.

The proposals would be “one of the essential foundations” of an economic modernisation law later this spring, Mr Fillon said.

“Nothing is out of the question,” he added, before making one exception: “One thing is certain: we will not raise VAT [in return for a cut in social charges]. The priority for me is reducing public expenditure.”

Mr Fillon has been credited with keeping Mr Sarkozy’s government focused on repairing France’s precarious public finances and cutting welfare and pension costs.

The prime minister’s quiet determination is beginning to pay off, with recent polls suggesting he was now more popular than the hyperactive president.

The FT also reports that sour describes the economic mood at the World Economic Forum. While there is always fierce debate, the comparison with last year is stark. Gone is all talk of a Goldilocks world economy – not too hot and not too cold – and it is replaced by fear of a nasty US recession that might spread.

Perhaps the best indicator of the changed mood is what those disposed to optimism are telling the Financial Times. Richard Cooper of Harvard University says “there will be more economic pain in the US”, while Fred Bergsten, director of the Peterson Institute for International Economics, argues that “the banking weakness will, of course, choke credit channels for a while but will be substantially offset by Fed liquidity injections and probably new government payments as part of the fiscal stimulus package”.

If the disagreements are sharp and the mood sombre, a limit does need to be put on the pessimism. No one at Davos is forecasting a world recession. Even the most pessimistic, those who foresaw the forces underlying the credit squeeze, such as Nouriel Roubini of New York University or Stephen Roach of Morgan Stanley, think world growth will slip below the 2.5 per cent mark.

The debate, then, is whether the turmoil in the financial markets, underscored by the collapse in the asset-backed commercial paper market since August, will cause a deep slowdown, or whether the power of continued globalisation and non-US growth can maintain the stellar growth rates that the International Monetary Fund still forecasts. Will the financial tail wag the economic dog? And does the rest of the world catch a cold when the US sneezes?

A fear stalking the world’s central banks is that the credit squeeze that started last summer will turn into a vicious circle, with restrictions on lending slowing economies, intensifying banking losses and further restricting their ability to lend.

Kenneth Rogoff of Harvard University and a former chief economist of the International Monetary Fund told the FT that this was “the canary in the coal mine” with Joseph Stiglitz, the Nobel prize-winning economist from Columbia University, adding that the analytical problems are magnified because “no one knows how far real estate prices will fall, how many mortgages will go into default, the extent to which the problems will spread to other credit markets, and the nature and effectiveness of the policy responses”.

Takatoshi Ito of Tokyo university voiced the fears of many in Davos, saying: “If financial turmoil spreads to local government bonds – through monoline failures – and other instruments, the situation would become serious”.

Edmund Phelps, another Nobel prize-winning economist attending Davos, said, with his characteristic wit: “Unfortunately, this episode may lead markets, with little to do, to become more aware of all the things to worry about, which had been ignored during the heady days of the boom.”

Prof Roubini is in no doubt. “It is not about whether we have a soft landing or a hard landing [in the US], but how hard the landing will be,” he says.

Should the rest of the world live in fear of US economic events? On this matter, Davos participants traded statistics with contradictory messages.

No, Dr Bergsten told the FT: “Emerging markets will remain largely immune, since they now account for almost half the world economy on a purchasing power parity basis.”

Mr Roach, by contrast, pointed out that if market exchange rates were used, US consumers spend six times more than China and India combined, so emerging markets would neither be immune nor would come to the rescue of world growth even if consumption there rose rapidly. “Europe is not going to get a special dispensation from a US slowdown,” he said.

Continued rapid growth on a PPP basis is unlikely to help the US or developed economies as strongly as some of the optimists hope, since a PPP dollar cannot be spent in world markets.

Surprisingly for a senior government official, David McCormick, the US Treasury undersecretary for international affairs, was also unconvinced of the ability of the rest of the world to escape the forces weighing on the US economy. A housing downturn, a retrenchment of risk and rising commodity prices were either global or widespread problems, he said, so it would be difficult for other countries to remain immune.

Nevertheless, Mr McCormick insisted, the US economy had “sound underlying fundamentals”.

 

The New York Times reports that even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.

While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.

The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent.

News of Wednesday’s meeting helped rally stocks, which had been down as much as 3 percent but ended up about 2 percent. Shares of MBIA jumped by nearly a third and Ambac jumped 72 percent, although they both remain far below their levels before the extent of the mortgage debacle became known.

Traditionally, bond insurance has been a low-risk business. State and municipal bonds rarely defaulted, so the insurers paid out few claims for such debt. But in recent years the bond insurers increasingly have guaranteed debt related to subprime mortgages, a business that they thought was safe but has turned out to be risky.

Now, as many subprime borrowers are defaulting, insurers could be obligated to cover some of the losses on securities backed by these loans.

Eric R. Dinallo, the New York insurance superintendent who regulates MBIA, called Wall Street executives on Tuesday to set up the meeting at his office in Lower Manhattan. He led the session on Wednesday and suggested that the group move in as little as 48 hours to get a deal done ahead of any downgrading of the bond guarantors by credit ratings firms.

According to two people, Mr. Dinallo said he would talk with the bankers one on one and reconvene the group — which included executives from Citigroup, Goldman Sachs and Merrill Lynch — on Thursday or Friday. Neither federal officials nor executives of the two insurers attended the meeting.

“Regulators are furiously trying to come up with a plan,” said Rob Haines, an analyst at CreditSights, a research firm, who was not at the meeting.

Mr. Dinallo could face resistance from banks that do not have significant exposure to the guarantors and thus have less incentive to put up money. It is also unclear how executives and shareholders of the companies would react to the plan and the prospect of ceding control.

Sean Dilweg, the commissioner of insurance in Wisconsin, which regulates Ambac, sat in on the meeting but said he would be working with Ambac directly. Mr. Dilweg said he met separately on Tuesday with executives at Ambac, which is based in New York but chartered in Wisconsin.

“Eric is looking at the overall issue, but I am pretty confident that we will work through Ambac’s specific issues,” Mr. Dilweg said in a telephone interview. “They are a stable and well-capitalized company but they have some choices to make.”

Other options open to the banks include providing lines of credit and other backup financing to the guarantors. A chief goal of any rescue would be to help the companies regain or keep triple-A credit ratings, which are seen as vital to their business.

Late last year, Mr. Dinallo encouraged Berkshire Hathaway, the company controlled by Warren E. Buffett, to enter the bond insurance business. At the time, Mr. Buffett said he did not want to invest in existing guarantors because of their financial problems, and he started his own firm instead.

Since then, the troubles have worsened. Last week, Fitch Ratings downgraded Ambac’s credit ratings to double-A, from triple-A. MBIA still has a triple-A rating from the three agencies; the others are Standard & Poor’s and Moody’s Investors Service.

While $15 billion might seem like a large amount of money for banks to commit to bond guarantors at a time when many investors have lost faith in them, Mr. Haines said it would be smaller than the billions the banks might have to write down if the companies lost their top ratings or incurred major losses.

“It’s a calculated kind of risk,” he said.

A spokesman for Ambac did not return calls seeking comment. A spokeswoman for MBIA declined to comment.

Analysts say it is unclear how much money would be needed to capitalize the companies adequately. Ratings agencies have changed their requirements several times already as they update their assumptions of defaults and losses on mortgage securities.

“What is needed to do the job is to solidify the market perception of a triple-A rating,” said Sean Egan, founder of Egan-Jones Ratings, a firm that says the companies may need to raise as much as $30 billion.

A recent effort by some banks to help a smaller bond insurer, ACA Capital, has not gone smoothly. The banks have twice agreed to give the company, which was downgraded to triple-C from single-A, more time to come up with an acceptable plan.

State regulators are under pressure to help solve a problem that many critics say could have been avoided with closer supervision. The insurers’ problems are also spilling over into the municipal bond market, making it harder for cities, counties and states to raise money for projects.

On Wednesday, for instance, some short-term insured municipal bonds, which typically trade at a premium to other bonds, were trading at a discount of as much as 1.5 percentage points to similar uninsured bonds, said Michael S. Downing, an account manager at Thomson Financial.

The companies have defended their assumptions. They also note that losses on the bonds that they insure would have to rise substantially before they would have to pay claims, and even then they would make interest and principal payments over the life of the bond, not all at once.

MBIA has estimated that in the worst case, which it described as a one in 10,000 event, it expects to incur losses of $10 billion, a fraction of the $673 billion it has insured.

Still, losses of that magnitude could strain the company’s finances, and the difficulties continue to mount. On Wednesday, Moody’s said it was considering downgrading a company, Channel Re, that reinsures more than $40 billion of insurance contracts written by MBIA. If the reinsurer is downgraded, MBIA, which owns more than 17 percent of Channel, would have to acknowledge fresh losses.

“If you are a bond insurer or bank you can never really eliminate the risk that you originated in entirety, unless you sell it,” said Edward J. Gerbeck, chief executive of Tempus Advisors.

The NYT also reports that even as the Federal Reserve grapples with the collapse of a speculative bubble in housing — the second speculative bust in less than a decade — is it at risk of repeating recent mistakes?

One day after the Fed slashed its benchmark interest rate to head off a possible recession, a small minority of economists warned on Wednesday that the central bank was in danger of invoking the same remedies that it did after the bubble in dot-com stocks burst seven years ago.

Though most experts agree that the economy is on the brink of a recession, and some even contend the recession has already begun, critics say the Fed’s attempted rescue looks uncomfortably similar to the aggressive rate reductions that aggravated the speculative bubble in housing.

“We’ve literally forgotten that this is the very policy environment that led to the housing and mortgage problems in the first place,” said Michael T. Darda, an economist at MKM Partners, an investment firm in Greenwich, Conn. “We’re not going to see another housing bubble, but we could see more inflation.”

Beyond the danger of higher inflation, some analysts warn that the Federal Reserve and its chairman, Ben S. Bernanke, could also lose credibility by appearing to act in knee-jerk response to plunging stock prices.

“They risk being seen as bailing out equity investors,” wrote Adam S. Posen, deputy director of the Peterson Institute for International Economics in Washington. “It makes it look as though stock market fears are driving the Fed to action.”

There are few signs yet of rising inflation, while the evidence is increasing that American economic growth has slowed to a crawl. Because a cooling economy usually damps inflation by reducing demand for goods and services, Fed officials are now far more worried about a painful slowdown than about inflation.

But other central banks are not following the Fed’s lead. Jean-Claude Trichet, president of the European Central Bank, strongly hinted on Wednesday that European policy makers would keep their benchmark rate unchanged.

“Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility,” Mr. Trichet told the European Parliament in Brussels. The Bank of England is not expected to reduce rates quickly either.

European central bankers face challenges that are different from those the Fed confronts. Few European countries have a housing collapse even remotely comparable to that in the United States, though many European banks are suffering big losses on their holdings of American mortgage-backed securities.

But Mr. Trichet’s comments sent a chill through stock markets on both sides of the Atlantic on Wednesday. Stock prices in the United States endured another day of brutal swings, swooning badly in the morning and early afternoon and then skyrocketing back up at the end of the day. The Dow Jones industrial average closed up nearly 300 points.

For Mr. Bernanke, the biggest risk now is that financial markets will become paralyzed by fear and that investors, corporations and consumers will pull back on their investing and spending, setting in motion a spiral of economic decline.

Many economists argue that Fed policy makers were entirely justified in reducing the overnight Federal funds rate by three-quarters of a percentage point on Tuesday, to 3.5 percent, and investors are betting that the Fed will lower the short-term rate another half of a point at a policy meeting next week.

“Credit conditions have not gotten any easier,” said Robert J. Barbera, chief economist at ITG Hoenig, an economic forecasting firm. Because of the continuing anxiety about soured mortgages and the need for banks to keep large volumes of loans on their own balance sheets, Mr. Barbera said, the credit crisis is extending beyond subprime mortgages to many kinds of business borrowers.

But there are hints that the Fed’s rush to reduce interest rates has already had a slight impact on inflation expectations.

Mr. Bernanke and other Fed officials contend that inflation expectations are crucial to the actual course of inflation. Fed officials closely scrutinize two measures of popular expectations.

One, the University of Michigan’s monthly survey of consumers, offers reassuring evidence that consumers’ long-run expectations have not changed much, even though consumers do expect higher prices over the next year or two — a reflection of concern about higher energy prices.

The other measure is the difference between the prices of normal Treasury securities and an inflation-adjusted type, known as Treasury inflation-protected securities, or TIPS. The difference in prices is thought to reflect investors’ expectations about inflation.

Brian Sack, senior economist at Macroeconomic Advisers in Washington, said the premium on inflation-protected five-year Treasury securities widened slightly after the Fed announced its rate cut on Tuesday. The increase was small, to 2.52 percent from 2.47 percent, and Mr. Sack cautioned that it could simply reflect market noise. But he said the implicit inflation premium was at the upper range of its level in the past two years.

“One of the risks inherent in aggressive easing is the possibility of dislodging inflation expectations,” Mr. Sack said.

Mr. Posen of the Peterson economics institute predicted that the Fed’s new policy of lower interest rates would provide “too much rather than too little stimulus” and help push inflation noticeably higher in 2009 and 2010.

But Mr. Posen added that the Fed was facing undeniable pressures to act decisively against a potentially serious downturn.

Mr. Bernanke and other Fed officials are well aware of the risks, and of criticism by some experts that the Fed’s cheap-money policies from 2001 to 2004 may have aggravated the bubble in housing.

Indeed, Mr. Bernanke resisted demands from Wall Street to reduce interest rates faster. As recently as three weeks ago, the Federal Reserve’s official stance was that the risks of slowing growth were still roughly balanced against the risk of higher inflation.

If the Fed continues to lower interest rates, as many Wall Street analysts predict, Mr. Bernanke is nonetheless likely to absorb as many lessons as possible from its experience after the dot-com bubble burst.

Frederic S. Mishkin, a Fed governor with close ties to Mr. Bernanke, suggested in a speech in August what one of those lessons might be. If housing prices plunged, Mr. Mishkin said, the Fed should cut rates quickly and substantially. But once the economy begins to recover, he continued, the Fed should raise them back to normal almost as quickly.


© Copyright 2009 by Finfacts.com

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Wednesday Newspaper Review - Irish Business News and International Stories - - October 22, 2014
Tuesday Newspaper Review - Irish Business News and International Stories - - October 21, 2014
Monday Newspaper Review - Irish Business News and International Stories - - October 20, 2014
Friday Newspaper Review - Irish Business News and International Stories - - October 17, 2014
Thursday Newspaper Review - Irish Business News and International Stories - - October 16, 2014
Wednesday Newspaper Review - Irish Business News and International Stories - - October 15, 2014
Monday Newspaper Review - Irish Business News and International Stories - - October 13, 2014
Friday Newspaper Review - Irish Business News and International Stories - - October 10, 2014
Thursday Newspaper Review - Irish Business News and International Stories - - October 09, 2014
Wednesday Newspaper Review - Irish Business News and International Stories - - October 08, 2014
Tuesday Newspaper Review - Irish Business News and International Stories - - October 07, 2014
Monday Newspaper Review - Irish Business News and International Stories - - October 06, 2014
Thursday Newspaper Review - Irish Business News and International Stories - - October 02, 2014
Wednesday Newspaper Review - Irish Business News and International Stories - - October 01, 2014
Monday Newspaper Review - Irish Business News and International Stories - - September 29, 2014
Friday Newspaper Review - Irish Business News and International Stories - - September 26, 2014