Political India: Engaging America

Labels: central bank, Federal Reserve, U.S. economy

In an announcement that is likely to deepen concerns over the U.S. economic woes the Federal Reserve has slashed growth and employment projections for 2011 and 2012.

Data projections released by the Fed suggested that it had revised a measure of the average, or “central tendency,” for the U.S. economy's 2011 gross domestic product growth rate from the 2.7-2.9 per cent range to the 1.6-1.7 per cent range. Similarly, the central bank cut its 2012 projection for growth from the 3.3-3.7 per cent range to the 2.5-2.9 per cent range.

Unemployment which in June the Fed projected would hover between 8.6 per cent and 8.9 per cent during 2011 was revised and projected to remain between 9 per cent and 9.1 per cent for the rest of the calendar year.

For 2012, the average unemployment rate was similarly revised upward from the 7.8-8.2 per cent range to the 8.5-8.7 per cent range.

Warning that many of the ongoing risks emanated from the continuing eurozone crisis Fed Chairman Ben Bernanke said in a press conference, “There are significant downside risks to the economic outlook, most notably concerns about European fiscal and banking issues [that] have contributed to strains in global financial markets, which have likely had adverse effects on confidence and growth.”

G20 meeting
The announcement by the Fed came on the eve of the G20 meeting in Cannes, France, this week, where world leaders from major economies will discuss strategies to stabilise the world economy and put the recovery back on a firmer footing.

Speaking ahead of the G20 meet, Angel Gurría, Secretary-General of the Organisation for Economic Cooperation and Development, said “Bold decisions are needed from the G20 leaders... to get the global economy back on track.” Mr. Gurria noted that an important first step had already been taken with the debt and banking crisis rescue plan announced by European Union leaders on October 26, but these measures must be implemented “promptly and forcefully”, he added.

Yet even as it issued these stark warnings the Fed ruled out any further actions such as interest rate cuts.

In a statement on the recent meeting of the rate-setting Federal Open Market Committee (FOMC) the Fed said that the FOMC had decided to keep the target range for the federal funds rate in the 0-0.25 per cent range.

Nine of the ten FOMC members, including Indian-American Narayana Kocherlakota, voted for holding rates at the same level, whereas one member, Charles Evans, was said to have supported additional policy accommodation at this time.

The Fed further said that it anticipated that economic conditions, including low rates of resource utilisation and a subdued outlook for inflation over the medium run, were likely to warrant “exceptionally low levels” for the federal funds rate at least through mid-2013.

Labels: Federal Reserve, GDP, US economy

Labels: Ben Bernanke, Federal Reserve, U.S. economy

From The Hindu

In a testimony to the Financial Crisis Inquiry Commission, Federal Reserve Chairman Ben Bernanke said that while risk-taking, at the heart of the financial crisis, could not be entirely avoided in a dynamic economy, a framework that promoted the “appropriate mix of prudence, risk-taking, and innovation,” was needed in order to achieve both sustained growth and stability.

Touching upon the triggers of the crisis, including private and public sector vulnerabilities, Mr. Bernanke also said to the Commissions that the crisis was amplified by the problem of “too-big-to-fail” firms. He said that such firms generated a severe moral hazard, an uneven playing field between big and small firms, and endangered systemic financial stability.

By way of solution to this problem, Mr. Bernanke said, the new financial reform law and current negotiations on new Basel capital and liquidity regulations had together “set into motion a three-part strategy to address too-big-to-fail.”

This strategy included “greatly” reducing the propensity for excessive risk-taking by large, complex, interconnected firms, allowing the government to resolve a distressed, systemically important financial firm in a fashion that avoids disorderly liquidation and increasing the resilience of the system by forcing more derivatives settlement into clearinghouses and strengthening prudential oversight of key financial market utilities.

Among the vulnerabilities of the private sector Mr. Bernanke cited dependence on unstable short-term funding, deficiencies in risk management, excessive leverage, need for better regulation of derivatives.

So far as the public sector’s role in the crisis was concerned, the Fed Chairman said that the main issues related to statutory gaps and conflicts, ineffective use of existing authorities and insufficient crisis-management capabilities.

Labels: Federal Reserve, financial crisis

From The Hindu

Federal Reserve Chairman Ben Bernanke cast some gloom upon recent claims of an economic upswing, arguing that small businesses in the United States were still very much facing the credit crunch.

Speaking at a Fed meeting series “Addressing the financing needs of small businesses,” here Mr. Bernanke discussed prospects for restoring the flow of credit to small businesses, saying, “the net percentage of survey respondents telling the National Federation of Independent Business that credit conditions have tightened over the prior three months has remained extremely elevated by historical standards.”

Job scene improves

The Obama administration came out strongly emphasising the improvement in job creation in the private sector for June as a sign of improving conditions in the U.S. economy. Last month, private-sector payroll employment edged up by 83,000 for the month and the overall unemployment rate edged down to 9.5 per cent. However overall employment declined by 125,000 for the month, reflecting a decrease of 225,000 jobs among the temporary employees working on the payroll of the U.S. Census 2010, according to the Bureau of Labour Statistics.

In his speech, Mr. Bernanke said that one measure of banks' loans to small businesses had dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. He added, “An important but difficult-to-answer question is, How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?”

Mr. Bernanke suggested that all three factors had played a role and therefore to support the recovery, the U.S. had to find ways to ensure that creditworthy borrowers had access to much-needed loans.

Concerted effort

In that context the Fed Chairman said that over the past two years, the Fed and other agencies had made “a concerted effort to stabilise our financial system and our economy…. [which] included working to facilitate the flow of credit to viable small businesses.”

In particular the Federal Reserve had attempted to bring capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility (the TALF programme).

Mr. Bernanke noted that more than 850,000 small business loans were financed in part by securities whose issuance was supported by TALF. Further, he said, stress tests that we conducted last year helped restore confidence in the banking system, allowing banks to raise the capital they need to help offset credit losses and, ultimately, to provide the basis for new lending.

Despite these improvements in lending conditions, Mr. Bernanke struck a cautious note, saying, “Though we believe that our and others' efforts are making a difference, we also know more must be done, and that additional effective action requires hearing firsthand from knowledgeable people who can speak from diverse perspectives about the challenges facing small businesses.”

Arguing that facilitating small business financing was not a simple or straightforward matter, Mr. Bernanke said that the term “small business” encompasses a heterogeneous mix of enterprises, ranging from pizzerias to start-up technology firms, and hence “we should be wary of one-size-fits-all solutions.”

Overall, he said, making credit accessible to sound small businesses was “crucial to our economic recovery and so should be front and centre among our current policy challenges."

Labels: Ben Bernanke, credit crunch, Federal Reserve, TALF programme

From The Hindu

Ben Bernanke, Chairman of the Federal Reserve, struck a note of cautious and qualified optimism regarding the possibility of a sustained recovery in the United States' economy.

On the down-side risks Mr. Bernanke warned that market concerns have mounted over the ability of Greece and other European countries to manage their 'sizable' budget deficits and 'high levels of public debt'; and also the U.S.' own fiscal position had deteriorated 'appreciably'.

Yet, he noted, in a speech before the Budget Committee of the House of Representatives, "The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year." He also added that on the inflation front, recent data continued to show a subdued rate of increase in consumer prices.

He added that the labour market, which was hard hit by the recession, had begun to show some 'modest improvement recently', in terms of employment — 431,000 more people were hired in May — hours of work, and labour income.

Markets cheered Mr. Bernanke's comments, rising during trading hours on Wednesday.

Indicating a positive prognosis for economic growth in the U.S., Mr. Bernanke said, "The latest economic projections of Federal Reserve Governors and Reserve Bank presidents… anticipate that real gross domestic product will grow in the neighbourhood of 3.5 per cent over the course of 2010 as a whole and at a somewhat faster pace next year."

Regarding the sources of growth in aggregate demand Mr. Bernanke cautioned that consumer spending was likely to increase at a moderate pace going forward, although it would be supported by a "gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions".

Underscoring the role of the business sector in driving growth he said, that looking forward, investment in new equipment and software was expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity 'as sales prospects brighten'.

Emphasising the risks that still remained in the system, primarily emerging from the turmoil in European markets, Mr. Bernanke noted that U.S. financial markets "have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets". He added that broad equity market indexes had declined, and implied volatility has risen 'considerably'.

However, he said that the actions taken by European leaders represented a firm commitment to resolve the prevailing stresses and restore market confidence and stability. "If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," Mr. Bernanke added.

Labels: Ben Bernanke, Federal Reserve, global economy, U.S. financial markets

From The Hindu

The Federal Reserve unveiled a new design for the United States $100 bill. While the new bill retains the traditional look of U.S. currency, it was loaded with “advanced technology to combat counterfeiting,” according to a statement by the Fed.

There key security features in the redesigned $100 note include a 3-D Security Ribbon and a Bell in the Inkwell, according to the Fed – security features that aimed to make it easy for consumers and merchants to authenticate their currency.

Elaborating on the technology, the Fed explained that the blue 3-D Security Ribbon on the front of the new $100 note contained images of bells and 100s that “move and change from one to the other as you tilt the note,” and the Bell in the Inkwell on the front of the note changed colour from copper to green when the note was tilted.

Treasurer Rosie Rios said, “The new security features announced today come after more than a decade of research and development to protect our currency from counterfeiting.” She added that the government would conduct a global public education programme to ensure a seamless introduction of the new $100 note into the financial system and spread awareness of the new security features.

Speaking on the occasion Fed Chairman Ben Bernanke said, “This job has become more complex in recent years as technology advances and U.S. dollar flows expand and increase.” In just the past 25 years, the value of Fed notes in circulation grew from $180 billion to $890 billion, an increase of almost 400 percent, he noted, adding that approximately two-thirds of all $100 notes circulated outside U.S. borders.

Mr. Bernanke said that the global public education program was crucial to the successful introduction of the new $100 note, because “a well-informed public is our first and best line of defence against counterfeiting.” He further explained that when the new-design $100 note is issued on February 10, 2011, the approximately 6.5 billion older-design $100s already in circulation would remain legal tender.

Touching upon the serious threat of counterfeiting Director Mark Sullivan of the Secret Service said, that his agency had learned to evolve to keep pace with the “advanced methodologies employed by the criminals we pursue.” Although less than 0.01 percent of the value of all U.S. currency in circulation is reported counterfeit, the $100 note is the most widely circulated and most often counterfeited denomination outside the U.S., he noted.

Labels: Federal Reserve, Security Ribbon