AUGUST 13, 2010

By Bruce MacNeil, Director, Short-Term Funding

The Federal Reserve’s Federal Open Market Committee renewed its commitment to low interest rates for the foreseeable future at the conclusion of its rate-setting meeting on August 10. The target federal funds rate will remain at a range of zero to 0.25 percent, where it has been since December 2008.

In its post-meeting statement, the Fed acknowledged the economic recovery has slowed in recent months. Ongoing weakness in the employment and housing markets, coupled with tight credit conditions, also caused the Fed to adjust its growth outlook, saying the pace of recovery would be “more modest in the near term than anticipated.” The labor market, in particular, is weighing heavily on the recovery; July’s anemic jobs report indicated only 71,000 net private-sector jobs were created during the month. Gross domestic product growth slowed from 3.7 percent in Q1 to 2.4 percent in Q2, and the U.S. trade deficit increased by 19 percent in June, highlighting a worrisome trend in economic performance.

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JULY 23, 2010

Industrial Production Edges Up Slightly

Industrial production edged up 0.1 percent in June, marking the fourth straight monthly increase in overall production. Although the increase was relatively soft, it did beat analyst expectations of a 0.2-percent drop for the month. Production during Q2 increased at a 6.6-percent annualized rate, down slightly from Q1’s 7-percent rate.

The small gain for June was concentrated entirely in mining and utilities, where output rose 0.4 percent and 2.7 percent, respectively. The utility output gain, spurred mostly by one of the warmest Junes on record, followed a 5.6-percent jump in May. Manufacturing dropped 0.4 percent for the month, the largest drop this year. Capacity utilization was unchanged at 74.1 percent. Manufacturers have helped lead the economy out of the recession, but continued growth will depend on recovery of the labor market over the next several quarters.

Source: Federal Reserve

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JULY 16, 2010

Smart Spending | Cumulative global investments in smart grid technology will approach $46 billion by 2015, according to a new report from Oyster Bay, N.Y.-based ABI Research. The majority will have been spent on transmission and distribution upgrades, the report estimates, with $41 billion in investments worldwide. Smart meter deployment will account for roughly $4.8 billion through 2015. ABI notes the investments are driven primarily by needed upgrades to an aging transmission and distribution infrastructure, and new demands placed on the system by intermittent renewable sources of energy. More information on the study, “Smart Grid Applications: Smart Meters, Demand Response and Distributed Generation,” is available on ABI’s website.

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CFOs Play It Safe | U.S. corporate finance executives are turning to safe, conservative investment patterns in the wake of the recession, according to the Association for Financial Professionals (AFP). AFP’s 2010 Liquidity Survey found many corporations are expanding cash stockpiles and investing in more conservative vehicles: Organizations are allocating an average 74 percent (up from 56 percent in 2006) of short-term investment balances in bank deposits, money market mutual funds and Treasury securities. Many companies have no immediate plans to start deploying cash in their businesses. AFP notes that although it is uncertain when investment comfort levels will begin to recover, increased cash holdings will make it possible to act quickly when organizations do choose to seize opportunities. Full survey results are available on AFP’s website.

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Ratings Upswing | U.S. credit-rating upgrades may exceed downgrades this quarter, a balance that has not occurred since the second quarter of 2007, according to data compiled by Bloomberg. At the end of last month Standard & Poor’s had lifted ratings of 238 U.S. issuers, while cutting 210. Moody’s Investors Service had upped ratings on 200 borrowers while downgrading 129. Investors look to the ratio for insight into the overall business cycle because credit quality varies with the state of the economy as a whole, according to Bloomberg.

JUNE 11, 2010

By Josh Silverman, Director, Term Funding & Risk Management

In prepared testimony to the House Budget Committee on June 9, Federal Reserve Chairman Ben Bernanke said the European sovereign debt crisis likely will have only a “modest” impact on recovery efforts in the United States if financial markets continue to stabilize.

“Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities,” he said. Read More »

JUNE 11, 2010

Census Hiring Paces Employment Gains

Bureau of Labor Statistics

View large chart

U.S. employers added jobs in May at the fastest pace in a decade, although gains were mostly a result of temporary government hiring for the 2010 census. Of the 431,000 net jobs created in May, 411,000 were linked to census hiring. The private sector, a better gauge of the labor market, only added 41,000 jobs—a disappointing performance following strong gains in March and April. The pickup in hiring, in addition to more workers dropping out of the labor force, brought the unemployment rate down to 9.7 percent from 9.9 percent. A 0.3-percent increase in aggregate hourly earnings and a 0.1-hour increase in the average work week were positive notes in May’s employment report.

Wall Street was disappointed by the payroll figures, as the consensus forecast was for an additional 536,000 jobs and greater job creation in the private sector. Following nearly two years of continual job losses, the U.S. economy has added 982,000 jobs this year and is expected to continue to add jobs throughout 2010. Read More »

MAY 14, 2010

By Josh Silverman, Director, Term Funding & Risk Management

The Federal Reserve’s latest quarterly senior loan officer survey revealed that lending standards at U.S. banks during the first quarter of 2010 were relatively unchanged from the previous quarter. In fact, lending standards actually eased somewhat across most loan types—a positive development after three years of tightening. Even with the slight relaxing of credit terms, however, the overall lending environment remains stringent.

Banks likely will be more willing to increase credit availability if the recovery appears sustainable. Yet, if history is any indication, the easing in lending standards and in the supply of credit will be slow. It took up to two years after the last two recessions ended for credit standards to relax.

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MAY 7, 2010

Last week, President Barack Obama nominated Janet Yellen, president of the San Francisco Federal Reserve Bank, to be vice chairman of the Federal Reserve Board, replacing current board vice chair Donald Kohn, whose term expires in June. Obama also nominated an economist and a lawyer to open slots on the seven-member board. If all three nominations are confirmed by the Senate, the Fed board would be at full strength for the first time in nearly four years.

Some news reports speculated the appointment of Yellen may be a bid by the Obama administration to keep short-term interest rates low and spur economic growth. Barclays Capital said Yellen “is believed to be the most dovish” Federal Open Market Committee member and has “openly expressed her concern about the risk of inflation declining rather than rising.”

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APRIL 30, 2010

By Josh Silverman, Director, Term Funding & Risk Management

As widely expected, the Federal Reserve left the federal funds target rate unchanged at a range of zero to 0.25 percent at the conclusion of its two-day Federal Open Market Committee (FOMC) meeting on April 28, and emphasized it will keep rates low for an “extended period.” The Fed continued to reiterate its view that “low rates of resource utilization, subdued inflation trends and stable inflation expectations” are key factors affecting its decision to leave short-term interest rates unchanged.

Not surprisingly, for the third straight meeting, Kansas City Fed President Thomas Hoenig dissented, arguing that the “extended period” language is no longer warranted because “it could lead to the build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the committee’s flexibility to begin raising rates modestly.”

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APRIL 30, 2010

Consumer Confidence Improves

The Conference Board’s Index of Consumer Confidence climbed 5.6 points in April to 57.9, beating consensus expectations of 53.5 and reflecting a more optimistic view of the economy. Although this is the highest level posted since September 2008, the overall index remains historically low. A reading above 90 indicates a stable economy; 100 or above signals strong growth.

Consumers’ assessment of current conditions rose to 28.6 in April from 25.2 in March, fueled by signs of an economic rebound. The expectations index, which measures how shoppers feel about the next six months, jumped to 77.4 from 70.4.

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APRIL 16, 2010

By Dwight Brown, Derivatives Supervisor

U.S. economic growth has improved over the past two quarters but this has not been due to consumers taking the lead on spending.

Growth has been driven by government spending and improvements in business inventory levels. Consumer spending remains important though, due to its 70-percent weighting in the calculation of economic growth. While there has been an improvement in consumer spending over the past two quarters, the depth of the spending decline in prior quarters and the significant hurdles still facing consumers are enough to question whether the recent improvement is sustainable. Read More »