NEW$ & VIEW$ (13 DECEMBER 2012)

Left hug Right hug Lawmakers Warn Budget Impasse May Last Through Holiday

White House and congressional officials warned their staffs that they may be spending the holidays at their desks in Washington, as both sides publicly refused to budge from their positions on taxes and spending.

Lawmakers from both parties expressed renewed pessimism yesterday about the prospects of reaching a deal before more than $600 billion in tax increases and spending cuts start taking effect in January.

“There just has been very little progress made,” Senator Dick Durbin of Illinois, the chamber’s second-ranking Democrat and a close ally of President Barack Obama, said.

“There’s no progress on anything,” Representative Pat Tiberi, an Ohio Republican who’s close to House Speaker John Boehner, told reporters. “Underline, bold — anything.”

Meanwhile, in the real world:

On Tuesday, we learned (from a record drop in the NFIB index) that small firms don’t plan to increase hiring or spending until the fiscal policy/economic clouds dissipate. On Wednesday, we learned that the largest companies don’t intend to pick up the slack. The Business Roundtable survey of 143 CEOs reported a further (modest) decline in its economic outlook index to a three-year low in Q4. Intentions to increase capital spending and hiring were little changed at the previous quarter’s modest levels. (BMO)

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So here comes the Fed to the rescue

 

Fed Ties Rates to Joblessness

The Fed extended its stimulus efforts and for the first time spelled out the unemployment level it would like to see before raising short-term interest rates.

The Fed said Wednesday, at the conclusion of its last policy meeting of the year, that it would enter 2013 with a plan to purchase $85 billion a month of mortgage-backed securities and Treasury securities, part of a continuing attempt to drive down long-term interest rates to encourage borrowing, spending and investing.

The Fed said it didn’t expect to touch short-term rates until it saw the unemployment rate fall to 6.5% or lower, as long as inflation forecasts remain near its 2% target. That would mean, according to the Fed’s economic projections, that it would keep short-term rates near zero into 2015. (…) The Fed projects the jobless rate will drop to between 6% and 6.6% by 2015.

Clearly the fiscal cliff is having effects on the economy,” he said, referring to the combination of expiring tax cuts and scheduled spending cuts set to begin early next month. “This is a major risk factor right now.” (…)

Under the Fed’s plan for 2013, the central bank will purchase $40 billion a month of mortgage-backed securities and $45 billion a month of long-term Treasury securities. That puts it on course to purchase $540 billion worth of Treasury securities if the policy is continued all year and $480 billion worth of mortgage bonds. (…)

The Fed will no longer be selling the short-term Treasurys because its stockpile of these securities has run down. Instead, it will be funding its purchases by adding reserves to the banking system, which essentially means it will be printing money to buy more bonds.

The FOMC also said for the first time that when it begins to tighten policy it will do so in a “balanced” way, suggesting that future rate hikes are likely to be at a moderate pace.  Bernanke confirmed this at the press conference.

The big surprise in the FOMC Statement was the introduction of the 6-1/2% threshold for the unemployment rate—i.e. rates can be expected to remain exceptionally low at least until we get to that level. Bernanke indicated that this threshold is fully consistent with the Fed’s earlier view that rates would stay low until mid-2015. However, note that the jobless rate has dropped by more than 2 percentage points in the past 24 months—a pace of more than 1 ppt per year, the most rapid pace of decline since the mid-1980s.

Given that the jobless rate fell to 7.7% in November, we could easily be at
6-1/2% by the end of next year. That’s 18 months before mid-2015, which leaves lots of room for debate on when interest rates will in fact start to rise. (BMO)image

Home Seizures Rise as Banks Adjust to Foreclosure Flow 

Home seizures in the U.S. rose 5.4 percent last month, the first annual gain in two years, as lenders seek to manage the flow of distressed properties without disrupting the housing recovery, according to RealtyTrac.

Banks repossessed 59,134 homes, up from 56,124 from November 2011, the Irvine, California-based data firm said today in a report. The increase was the first since October 2010, when foreclosures slowed after allegations that lenders were using faulty practices to take property from delinquent homeowners. Seizures climbed 11 percent from the previous month. (…)

The five largest lenders in February agreed to a $25 billion settlement of the charges and have since been pursuing foreclosure alternatives such as short sales, where a property is sold for less than the amount owed. Repossessions since March have slowed to fewer than 60,000 a month, an “acceptable” level for servicers that previously had struggled to process a flood of distressed homes, Blomquist said. (…)

Danone in Cost-Cutting Plan

The world’s largest yogurt maker said it is launching a cost-saving plan as it seeks to offset steep sales declines in Europe.

Barclays to Join Cost-Cutting Crowd

Barclays plans to eliminate up to 2,000 jobs—likely concentrated in Asia and continental Europe—making it the latest entry in a global banking cost-cutting spree.

SNB Maintains Ceiling as European Woes Weigh on Franc: Economy

 

The Swiss National Bank (SNBN) maintained the currency ceiling at 1.20 francs per euro today and reiterated that it will uphold the measure “with the utmost determination.”

The SNB’s foreign-currency reserves have surged almost 70 percent over the past year to 424.8 billion francs ($459 billion) at the end of November as policy makers stepped up euro purchases to curb flows sparked by the region’s debt crisis. (…)

The SNB today maintained its growth estimate for this year of about 1 percent, while forecasting gross domestic product to increase between 1 percent and 1.5 percent in 2013. Consumer prices may drop 0.7 percent this year and 0.1 percent in 2013, before rising 0.4 percent in 2014, it said. In September, the central bank forecast prices would fall 0.6 percent this year, followed by an increase of 0.2 percent in 2013.

 

U.K. Lifts Shale Ban

The U.K. lifted a moratorium on exploratory hydraulic fracturing as it looks to stimulate investment in finding new domestic reserves to offset declining North Sea production

 
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