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Interest Rates

Fed's Discount-Rate Increase Illustrates Exit-Strategy Challenges That Await the U.S. Central Bank

Is the U.S. Federal Reserve finally launching its "exit strategy?"

When the nation's central bank boosted the discount rate last week, it assured investors that this wasn't a monetary tightening. The assurance didn't seem to matter. The move late Thursday touched off a furious global-market reaction and U.S. dollar increase on Friday. This demonstrates the challenge the central bank will face as it crawls toward an ultimate increase in interest rates.

In a move that surprised the markets, the Fed announced Thursday that it was increasing the rate it charges banks for emergency loans to 0.75% from 0.50%. The also reduced the central bank also slashed the maximum-loan-maturity length from 28 days (it was once as high as 90 days) to overnight.

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The Five Factors That Could Rescue U.S. Stocks

When the stock market is enduring as much trouble as it has been lately, it pays to remember that there are still many positive catalysts that are in place and working to buoy securities prices.

Let's take a few moments to consider the top candidates:

  • A Friendly Fed: The current U.S. Federal Reserve under Chairman Ben S. Bernanke is the most accommodative in history and is likely to keep short-term interest rates at or near zero for the remainder of this year. Occasionally there will be rumblings of an increase - as there was in The Wall Street Journal last Monday, but they are likely just smoke screens.
To find out about the other four factors - as well as three possible profit plays - please read on ...

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Seven Signs of the Fed's Eventual "Exit Strategy"

Looking for an exact date when U.S. Federal Reserve Chairman Ben S. Bernanke and his fellow central bank policymakers will raise interest rates?

Experts refer to this eventuality as Bernanke's "exit strategy" - a financial euphemism for the interest-rate increases that are certain to come ... at some point.

That's just it - those experts can't tell you when that exit strategy will begin. I can't tell you that, either (Sorry, loaned my crystal ball to Miss Cleo for her new infomercial).

But what I can give you that the pundits can't is a "Road Map to Higher Interest Rates," which spells out the specific events that should precede the most-heavily anticipated U.S. central bank interest-rate increase in history. Follow it and you should be perfectly positioned to profit when the time comes.

(Remember, a few months ago, I introduced Senior Secured Floating Interest Rate Bonds, or SSFRs, an investment that you'll want to own when interest rates rise.)

So, without further ado...

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Fed Gambles on Low Inflation and a Stable Housing Market

The so-called "exit strategy" has yet to enter the picture.

U.S. Federal Reserve policymakers yesterday (Wednesday) announced that the benchmark Federal Funds rate would remain in its record-low range of 0.00% to 0.25% for an "extended period." And policymakers also said that the nation's central bank would continue with its plan to wind down its purchases of agency debt and mortgage-backed securities.

The term "exit strategy" is a financial euphemism for boosting interest rates. By keeping short-term interest rates at what many experts say are artificially low levels, the Fed is betting that inflation will remain subdued in the short and medium-term and that the beleaguered U.S. housing market will be able to stage its recovery without crutches.

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My Confrontation With Ben Bernanke: The One Question He Refused to Answer

The Secret Service agents watched me warily as I approached U.S. Federal Reserve Chairman Ben Bernanke.

I didn't waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January 2007. I circled all the times he used the words "panic," "crisis," and "stress" in his speech, entitled "Central Banking and Bank Supervision of the United States."

A total of 36 occasions.

I asked him point-blank: "Did you know in advance that a financial crisis was headed our way?"

He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled.

And he refused to answer.

But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, "Yes."

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Can Bernanke Tune Out Political Pressure as the FOMC Again Ponders Policy Changes?

When U.S. Federal Reserve Chairman Ben S. Bernanke emerges from the central bank's monthly policymaking meeting at around 2:15 p.m. today (Wednesday), it's a near certainty that he'll reaffirm his pledge to keep interest rates "exceptionally low" for an "extended period" of time.

Bernanke has kept the benchmark Federal Funds rate at a record low range of 0.00%-0.25% since December 2008, and that's not likely to change as a result of today's meeting of the central bank's Federal Open Market Committee (FOMC).

At some point, however, Bernanke will have to tighten credit and raise interest rates in order to soak up all the excess liquidity and curb inflation in the U.S. economy. But the question remains: When that time comes, will Bernanke have the fortitude to do so?

There's no simple answer. And for good reason: With the country mired in its worst financial crisis in most Americans' lifetimes, the central bank's decisions now are as political in focus as they are economic.

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China is Doing Exactly What the United States Should be Doing – Looking Ahead

After boosting its economy with an $885 billion (2 trillion yuan) stimulus package, China is doing exactly what the United States should be doing - turning its attention toward inflation and excess lending.

The People's Bank of China (BOC) yesterday (Thursday) raised the interest rate on its three-month bills for the first time since Aug. 13. The central bank sold $8.8 billion (60 billion yuan) of three-month bills at a yield of 1.3684%. That's up from 1.3280% last week.

Also, the BOC this week drained a net $20.1 billion (137 billion yuan) from the money market through its open-market operations - its largest weekly fund withdrawal in nearly three months.

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A Note to Bernanke: Sorry Ben, More Bureaucracy Isn't the Answer

U.S. Federal Reserve Chairman Ben Bernanke's latest thesis is that the home mortgage bubble had little to do with record low interest rates, and was actually much more a problem of regulation.

It sounds plausible - until you give it some real thought. After all, I believe that humanity has already tried a system with tight, vigorously enforced regulations, and no price mechanism.

It was called the Soviet Union.

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Markman on the Markets: Historic Bull Run in Bonds Points to Higher Prices for U.S. Stocks

A sluggish month in the stock market has equity investors worrying about what's next.

But those equity investors would feel so much better if they'd just spend a little time studying the credit markets. And with good reason: The bull market in credit that continues to rage in the face of this stock-market lethargy leads us to one simple conclusion.

Stock prices have to head higher.

Indeed, independent analyst Brian Reynolds tells us that if stocks were trading at the same level as credit, the Standard & Poor's 500 Index would already be at 1,350 - 22% above where it closed on Friday.

For those who argue that the market has already rallied a great deal, or too much, let me just note that the S&P 500 would have to rise by another 41% just to get back to the level of three years ago. The key thing that bulls have in their back pocket is that investors are still trying to get used to the idea that the sky hasn't fallen - and have not yet priced in the prospects for a 25% increase in S&P 500 profits that we are likely to see in 2010.

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Fed Preparing Unorthodox Exit Strategy

The U.S. Federal Reserve may take an unorthodox approach to raising interest rates by paying interest on bank reserves rather than relying on traditional open market remedies, as it exits from its long-term fiscal stimulus programs, Reuters reported today (Tuesday).

Paying interest on reserves is mostly untested and would represent an unexpected twist in the Fed's response to the financial meltdown.

"In the old days ... the Fed controlled the federal funds rate with open market operations," Antulio Bomfim, a former Fed economist now with Macroeconomic Advisors LLC in Washington told Reuters. "Now, at least in this period when reserves are over-abundant, the way the Fed hopes to raise the federal funds rate will be primarily by raising the interest rate it pays on reserves."

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What Investors Should Look for in Today's Fed Statement

In its continuing efforts to nurture the fragile economic recovery, the U.S. Federal Reserve is widely expected to leave interest rates at record lows when it concludes its meeting today (Wednesday).

However, observers will be closely examining the details of the language in the statement of the Federal Open Market Committee (FOMC) meeting for hints as to when it plans to change monetary policy.

The overwhelming consensus is that the Fed will hold the federal funds rate steady at near-zero until the second half of next year. But that assumes the economic growth will stay in line with the Fed's current forecast - a weak recovery with subdued inflation and slow growth.

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The Only Way to Profit From a Stock Market Bubble

Former U.S. Federal Reserve Chairman Alan Greenspan said it was impossible to tell a bubble while you were in it. Well Alan, I’ve got news for you: We’re in one now. The Standard & Poor’s 500 Index is up 58% from its March lows, gold has finally broken through the $1,000-an-ounce level – and may […]

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U.S. Stocks: Winning Streak is Over, But Bull Market Continues

The winning streak is over. But the outlook for stocks remains upbeat. U.S. stocks on Friday suffered their first setback after six straight days of gains, but the damage wasn't severe. No news appeared to precipitate the decline, so chalk it up to light profit-taking. In the Friday session, the Dow Jones Industrial Average lost […]

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Short-Term Rates Rise Despite Central Bank Efforts

By Jennifer YousfiManaging Editor Interest rates for short-term loans with a maturity of three months or less continue to inch up, despite moves by global central banks to restore liquidity in the markets. "There's really only a handful of banks that are offering cash," Ronald Tharun, a money-market trader at a unit of Landesbank Baden-Wuerttemberg, […]

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Payrolls Plummet, Odds of a Rate Cut Improve

By Jason Simpkins Associate Editor Payrolls fell for a second straight month, suggesting that a recession has taken root in the beleaguered U.S. economy and the Federal Reserve will have to take greater steps to increase liquidity and preserve growth despite rising inflationary pressures. U.S. payrolls suffered their biggest monthly decline in five years in […]

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