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What does the Fed mean?
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By Erica Elliott
As any economist will tell you, the statements by the Federal Open Market Committee (FMOC) on the federal funds rate are cryptic, and purposefully so. In attempting to decode the press release, economists and the business press turn into what seems like a gaggle of girls performing a post-date analysis for a sorority sister: “When he said he liked you, did that mean he ‘liked you’ liked you, or just liked you?”
At the risk of likening Ben Bernanke to my ex-boyfriend, he has communication issues. The FMOC has 12 voting members, comprised of selected Federal Reserve Bank presidents and seven Fed governors, and has eight regularly scheduled meetings a year. After each of these meetings, a carefully crafted press release is issued to the public at 2:15p.m. on the day the FMOC meeting concludes. This statement contains the results of the deliberations of the meeting, and is about as extensive as Susan Lucci’s Emmy collection. The Fed uses the same format for the release each time, causing economists to intensely analyze words and phrases that were omitted from the current release. It barely fills a single page and contains virtually no numbers; it’s brevity leaves much room for interpretation by the media, and everyone is trying to figure out one thing: How does the Fed presently perceive the economy?
At the risk of getting trampled in the mêlée, we’re going to jump right in and do a little of our own interpretation, independent of the opinions from the news media (after all, turning to The New York Times for their opinion is like listening to the best friend who says you looked good with the perm).
The Federal Reserve Release is as follows (with my notations added in bold):
“The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. (The function of this sentence to summarize the outcome of the FOMC vote on interest rates – as a note, September was the first time the central bank dropped the funds rate in four years.)
“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
(This brief section describes the economy’s current state based on the latest economic indicators.)
“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
(The preceding and the following paragraphs are the most carefully studied in the release. This part highlights the Fed’s assessment of inflation and growth. What trends do they display, and what are the underlying forces that propel both?)
“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
(This paragraph is more forward-looking and offers some insight into what the FOMC will monitor most closely between now and the next meeting. Here’s where economists and investors get a sense of what the Fed will be inclined to do when it meets next.)
“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;…and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.
(This lists the names of FOMC members who participated in the meeting that morning and how they voted. Generally speaking, participants on the FOMC will align their votes with that of the Fed chairman. On matters as important as setting interest rates, the preference is to have unanimity among the members. There are occasions when certain participants disagree so strongly with the Fed chairman’s recommendation that they will formally register their disapproval. (this release, for example))
“In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.” (This statement is not typically included, but September, October, and December’s releases have all seen similar actions. The discount rate is the interest rate banks must pay when they borrow from the central bank. The discount rate cut is intended to alleviate liquidity issues many banks are now facing.)
The rationale behind the lower rates is that it will induce consumers and businesses to boost spending, which will invigorate economic activity. Therefore, the solution to what seems to be a slowing economy is speeding up the economy (wow, sounds so simple, and yet…). “But Erica, I’m scared!” I hear you saying. “I keep hearing the economy is so bad,” you nervously say. In that case, have you heard that from July through September, the economy logged its best growth in four years? I bet you didn’t. Ignore what you hear and get out there and invigorate that economy! (Besides, it’s better idea than getting a perm)
Holiday cheer makes a great sales time of year
By ANNA THIBODEAUX of The Huntsville Times
For The Times htimes@bellsouth.net
Decorated, well prepped homes do well at year-end
If you're one of those sellers waiting until spring to put your house on the market, then a little sales information may have you rushing to put a giant bow on your house so a grateful buyer can put it under the Christmas tree this year.
The North Alabama Multiple Listing Service shows that November and December are stronger selling months than January and February, says Erica Elliott, director of communication with Weichert Realtors - The Executive Group in Huntsville. In 2006, the average number of houses sold a month was 1,068, with only a slight decrease in sales during the holidays (931 in November and 915 in December).
Elliott says sales declined in January and February because people are "recharging" from the holidays. January 2006 had a 31 percent decrease in sales to 734 houses (91.4 percent were existing houses) with February at 914 houses (91.8 percent existing houses) sold.
"The holidays can be a great time of year to sell your home," Elliott says. "Buyers that are looking tend to be more serious and they have more time to shop together, which is an advantage over other times of the year. Sellers may get dismayed easily, as a result of the slower traffic; however, they should keep in mind that it's the quality of buyers versus the quantity."
You got that last part, right? Fewer, but better buyers.
As a builder, Tammy Stanfield, owner of Stanford Properties in Huntsville, says February is a stronger month for sales because the holidays are a tougher time for packing and moving, and most people tend to settle in with only thoughts of sugar plums dancing in their heads. But she also says it's a good time for a buyer who needs a quick move to shop now because these houses tend to be vacant, which could facilitate a smoother move.
Also, a quick tip to buyers. Elliott says that despite many of you waiting until summer to move to avoid relocating during a school year, you should consider that the break between semesters is also a convenient time for moving. Here's another potential advantage: "For both buyers and sellers, an advantage to holiday real estate transactions is that real estate agents, as well as lenders, home inspectors, appraisers, and title companies, have more time to spend with clients than at busier times of the year."
Back to the subject of decorating your house like a present, she also says smartly decorated houses may move buyers past flaws and toward seeing themselves living in your house. Elliott suggests that you decorate tastefully so you don't alienate your prospects. This means you may want to hold off on inflating that giant bouncy, waving Snowman for the front yard until next year.
Stanford also recommends the "tastefully decorated" approach. A vacant house she's selling now is decorated with a tree with lights and small touches in the kitchen with a holiday theme. She adds, "I am hoping that by decorating the home, that a family could see themselves there at Christmas time."
She also emphasizes that you should eliminate clutter, which can be challenging when things are typically shifted around to allow for a Christmas tree and other decorations. Just try to "make sure the house still flows and does not look crowded."
It isn't news that the holidays are stressful, so Elliott also advises that holiday selling is not for the faint of heart. One reason for this point is that you'll have to keep the house immaculate for prospective buyers at a time when you're rushing to great department store sales and digging for grandma's awesome fruitcake recipe.
Stanford also offers these insider tips to help you glide through a holiday sale:
Buyers typically want a quick close date prior to Christmas.
Sellers can be a little insecure about strangers in the house for viewings with gifts wrapped.
Be ready for a fast move if necessary to make the sell work.
Regina Underwood, broker and owner of A Realty Group in Madison, adds that you should have the house ready to show at all times, because she also says holiday buyers are serious and ready to move, so you need to be, too.
Make those necessary repairs and upgrades, too, which is a good move whether selling in fall or spring.
Early prepping lets you enjoy your house until you put it on the market, she says. It also lets you budget for those upgrades rather than face a money crunch, eases the stress of gearing up for a sale and promotes a faster sale because your prepping hopefully earned you a shorter list from the home inspector.
Here's a basic "to do" list:
Spruce up landscaping by reseeding and fertilizing the lawn.
Repair rotted areas, recaulk and paint all surfaces to repel water. Especially improve the front door and all entranceways to promote a better impression with prospective buyers.
Pressure wash all concrete surfaces, clean light fixtures and added new bulbs to all fixtures.
On the interior, freshen up or repaint in neutral colors. Clean out closets, box all unused items (rent a Pod if you need storage, and have it picked up), wash baseboards and all trim, clean blinds, wash curtains and remove all heavy window coverings.
If you got tired just reading this list, Underwood says delaying this work could just end up doubling it and the time needed to get it done as deterioration continues. Also, she says that with an increasing number of new houses being put on the market, existing ones need to be in top shape and require minimal repairs to bring top value.
So, as you contemplate whether the holidays are your opportunity to make that fast house sale, here's a parting thought to hopefully help you sort it out.
"The important thing to remember when you are contemplating whether or not to sell your home is your motivation," Elliott says. "If you need to move, regardless of the time of year, it's always a good time to put your home on the market. If you are contemplating putting your home on the market just to see what happens, I would advocate that you wait until you are truly motivated."
Winterize Your Home and Save Some Cold Hard Cash
By Erica Elliott
As the colder months approach, it is essential to be aware of the importance of preparing your home for the winter season. According to the Department of Energy, the cost to heat an average home is approximately $1,400. If your home is winterized the right way, you can save up to 50% on your heating costs. The steps required to protect your home are simple, and for the most part, you can perform all of these tasks by yourself. Just keep in mind the acronym “CHILLY.”
C is for “Caulk”
Begin your self-home inspection by purchasing a few tubes of standard caulking, or you may choose to invest in caulk made especially for weather below 40 degrees. Caulk is about $10 a tube, and yet it can save you between $80 and $100 a year. Caulk any cracks in your homes’ exterior, and be especially mindful of the areas around your windows and any exterior faucets. Cracks in your interior may cause a massive leak of hot air from your home. Pay special attention to electrical outlets on perimeter walls and drafty windows.
H is for “Hot Water Heater”
As much as 14% of your overall winter utility bill may be attributed to the cost of hot water. You can easily save between $30 and $40 dollars with a $15 dollar hot water heater blanket, which can be used to insulate your pipes and your hot water heater.
I is for “Insulation”
Since warm air rises, insulating your attic is an easy way to retain your hot air. If you can see your ceiling joists, your attic is not adequately insulated. Traditional insulation costs approximately 25 cents a square foot, but can amount to a yearly savings of $150 to $200.
L is for “Leaks”
A drafty fireplace or cracks around your doors and windows can result in lost hot air. Adding weather-stripping around your doors and windows and requesting that a professional inspect your chimney and fireplace can remedy this dilemma.
L is for “Lower the Thermostat”
Consider investing in a setback thermostat. This allows you to heat your home when you are there and let the temperature drop a little when you are out. It is much less expensive to heat the home back up than it is to keep it at the same temperature all day long.
Y is for “Yearly”
Every year, have a professional inspect your heating system to ensure that it is operating properly. Having your filters and ducts cleaned will immediately increase the amount of heat produced in your home.
By remembering the “CHILLY” acronym, you can avoid long-term problems with your heating system and save money on your heating expenses.
GOOD NEWS
Retail Sales Suggest Economy May Be Stronger Than Expected
Source: The Wall Street Journal
U.S. retail sales surged during November, making a surprisingly strong, broad-based climb that suggests the economy might not be as weak as feared.
Meanwhile, U.S. wholesale prices soared last month at their fastest pace since the Nixon Administration, spurred by record gains in energy prices. In a worrisome sign for Federal Reserve officials, price pressures appeared to seep beyond just energy and risk becoming embedded deeper in the production pipeline.
Retail sales increased by 1.2%, the Commerce Department said Thursday. Sales went up an unrevised 0.2% in October.
This Week in Financial News…
FORBES MAGAZINE
Happy New Year?
Liz Moyer
Tuesday the Fed cut rates by another .25%, hoping to reignite the credit markets, stalled by the loss of confidence brought on by the subprime meltdown.
Wednesday they were at it again, along with Bank of Canada, Bank of England, the Swiss National Bank and the European Central Bank, taking steps "to address elevated pressures in the short-term funding markets," auctioning $40 billion worth of short-term loans over the next two-and-a-half weeks and setting up temporary currency swaps with the Swiss and European central banks.
Enough? Some say no."It may take more rate cuts or some positive economic news to increase risk appetite," says Standard & Poor's fixed income analyst Diane Vazza.
But one important fix is being overlooked: time.
"The fixed income market is simply going through a repricing of credit risk," says Sanford Bernstein analyst (and former Morgan Stanley treasurer) Brad Hintz. "Let's remember that much of this pressure will end on the first trading day of the New Year."
Why? Credit always tightens at the end of the calendar year because commercial banks pull back from lending and shed assets to boost their tier one capital, a crucial measure of a bank's financial condition. Adequately capitalized banks have a tier one ratio of 4%. Well capitalized banks have greater than 6%. Obviously, it's better to have more…(Read more at Forbes.com)
Fed Pitches A Curve
Evelyn M. Rusli
In a dramatic attempt to calm the global credit crisis, the Federal Reserve is undertaking a multi-national plan that aims to encourage lending in the financial markets. The Fed will work in concert with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
One of the new initiatives announced Wednesday is the Term Auction Facility program, which will auction off more than $40 billion in loans to financial institutions. In the Fed’s words, the facility will “promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.”
The program would widen the participation in short-term financing beyond the big banks and brokers that are primary Fed dealers, allowing most U.S. banks to interact directly with the central bank. Traditionally, the primary dealers buy and sell short-term securites to and from the Federal Reserve Bank of New York, which can add or drain funds from the money supply through these transactions. But it does no good to add money to the financial system -- which has the effect of lowering the federal funds rate -- if banks simply stash the extra cash in government bonds instead of lending it out.
The new auction facility will consist of four transactions. The first auction, set for $20 billion, is scheduled to begin on Monday and end on Thursday of next week. The second auction, which will also be $20 billion, will commence Dec. 20, with a settlement on Dec. 27. This auction will dole out 35-day loans. Finally, the third and fourth auctions will be in mid-to-late January, but the amount and duration of these term funds will be decided in January…(Read more at Forbes.com)
Rich Countries Funding Big Banks
Robert Lenzner
Three cheers for sovereign wealth funds--the Government of Singapore Investment Corp., the Abu Dhabi Investment Authority, China Investment Co. These and dozens of other government investment vehicles from the Gulf states to the Far East are the pools of wealth that have become a source of rescue capital for troubled financial giants like UBS, Citigroup and Bear Stearns.
Who else but these giant pools of fast-growing capital could have moved so quickly to commit vast resources to financial giants in need? Moreover, they've also been a strong support for the stock market as the financial sector rallied from what looked to be a sickening decline with no bottom in sight.
This global flow of funds to the sovereign wealth funds and their central banks is growing by $1 trillion a year, thanks in part to $90 a barrel oil and Chinese exports. Such a radical reversal in the flow of funds is bound to be controversial. When their assets are added to those of central banks stuffed with petrodollars, these new investment phenomena are truly the fastest-growing institutionalized wealth in the world.
At the same time, we should be celebrating that they are mostly long-term investors like Warren Buffett and are not trying to flip their investments in three to five years, like the private equity behemoths--though some like Dubai have been known to cash out of their investments quickly. Sovereign wealth funds from the likes of Dubai, Qatar, Kuwait, Norway, Kazakhstan and now Brazil are players that will assume an ever greater role in supplying capital. Protectionist elements may try to politicize this development, which they view as a threat to the independence of the U.S. private sector…(Read more at Forbes.com)
BUSINESS WEEK MAGAZINE
The Fed's Mild Medicine
Peter Coy
Give Federal Reserve Chairman Ben S. Bernanke an "A" for creativity. As the credit crunch worsened this fall, Bernanke saw a financial system in shock but an economy that seemed relatively healthy. He wanted to restore confidence in the banks without flooding the system with money, which would risk an outbreak of inflation.
His solution: First, on Dec. 11 the Fed cut rates by a modest quarter point. Then on Dec. 12 the central bank unveiled a brand-new monetary tool—a periodic auction of loans to banks. These will be secured by a wide variety of collateral, including mortgage-backed securities. By lending freely to beleaguered banks, the Fed is sending a signal: We won't let this credit crunch spiral downward into an outright crisis.
Whether it works depends on how you define success. The so-called Term Auction Facility should help relieve the stresses in the financial system that have left banks afraid to lend even to one another because they don't trust the quality of borrowers' collateral. With the Dec. 12 announcement, the possibility of a financial-sector meltdown has diminished.
For the overall economy, though, it's no miracle cure. It's specifically not intended to expand the supply of money in the economy. And it does nothing to strengthen banks' weakened balance sheets. So even with the new Fed backstop, lenders may remain reluctant to lend. To revive economic growth, more action will likely be required: bigger rate cuts, stronger government measures to clean up the subprime debacle, or some combination of the two.
The Fed will lend up to $20 billion at each of two December auctions, with two more scheduled for January. Rates will be set through bidding. They probably will be at least as high as the federal funds rate, which banks charge each other for overnight loans of reserves, but lower than the discount rate the Fed itself charges for loans.
The key is that the Fed will lend to any healthy bank and will accept many types of collateral, perhaps placing a higher value on it than the banks would be able to get on the open market. The Fed also arranged to swap currencies with the European Central Bank and the Swiss central bank, allowing those institutions to lend up to $24 billion to banks that have trouble borrowing dollars on the open market.
With the economy slowing, Bernanke & Co. will probably have to cut the fed funds rate again, though they may not like it. If rates fall far enough and stay down long enough, they will stimulate growth by encouraging more purchases of cars, houses, and business equipment, notes Laurence M. Ball, an economist at Johns Hopkins University. How far down? Goldman Sachs (GS) Chief Economist Jan Hatzius, one of the most bearish figures on Wall Street, expects the Fed to cut the funds rate to 3% by mid-2008, 1.25 percentage points below its current level…(Read more at BusinessWeek.com)
THE ECONOMIST
Unclogging the system
Cental bankers are supposed to be boring and predictable. But on Wednesday December 12th the rich world’s monetary authorities stunned financial markets with a dramatic, joint plan to ease the liquidity squeeze in global money markets. America’s Federal Reserve, the Bank of England, the European Central Bank (ECB), the Bank of Canada and the Swiss National Bank all pitched in. The central banks of Sweden and Japan said they, too, were watching developments and would act as necessary. All told, it was an impressive show of central-bank co-ordination.
The central banks have pinched each others’ best ideas for how best to ensure that liquidity gets where it is needed. And they have also, in effect, acknowledged the international nature of the liquidity squeeze, by promising to provide reciprocal currency-swap lines.
The Fed made the most dramatic changes. It introduced a “term-auction facility” through which all banks eligible to borrow from the discount window could bid for one-month money. The first two auctions are to be held on December 17th and 20th, with $20 billion to be sold at each. Two more are to follow in January. The Fed also announced temporary swap lines with the ECB and the Swiss National Bank, worth $24 billion, allowing those central banks to lend dollars to banks pledging euros or other currencies.
The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market.
Furthermore, central banks will now be more intricately involved in the unwinding of the credit mess. Since eligible banks have similar access to the liquidity auction, the central banks are implicitly subsidising weaker banks relative to stronger ones. By broadening the range of acceptable collateral, the central banks are taking more risks onto their balance sheets.
Set against the dangers of all-out financial seizure, these risks seem worth taking. More important, if they succeed even in modestly loosening the money markets, they will reduce the pressure on central banks to use the broader tool of lower interest rates…(Read more at economist.com)