plus 3, Fed chief outlines plan to rein in stimulus aid - MSNBC
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- Fed chief outlines plan to rein in stimulus aid - MSNBC
- Bernanke: Fed May Move Away From Federal Funds Benchmark When ... - RTT News
- Ben Bernanke's Prepared Testimony To House Panel - Post Chronicle
- Investing on the Web, beyond stocks - Financial Post
Posted: 10 Feb 2010 07:37 AM PST
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Bernanke Outlines Strategy For Unwinding Fed's Accommodative Policy
2/10/2010 10:44 AM ET
(RTTNews) -
Written testimony from Federal Reserve Chairman Ben Bernanke released on Wednesday outlined a definite strategy for unwinding the Fed's accommodative policy but provided no timetable for when it would do so, instead saying that the central bank would be ready when the time comes.
"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding," Bernanke said in prepared remarks.
He added, "We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively."
Though no timetable was given, Bernanke did outline specific strategies that the Fed could implement to unwind policy.
The central bank chief said that the Fed may move to a new benchmark target rate other than the federal funds rate.
In the testimony, prepared for a postponed hearing before the House Financial Services Committee, Bernanke said that the Fed may raise interest rates on reserves first, in order to put pressure on short term rates, and added that the Fed is also considering raising the discount rate in the near future.
"By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks," he said.
He did say, though, that no decision has been made on the issue, and that the Fed would eventually return to the federal funds rate as its operating target, if it were to focus elsewhere for a time.
Bernanke also outlined other additional tools the central bank would use to reduce the reserves held by the banking system.
"Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates," he said.
The Fed chair went on to say that the central bank has enhanced its ability to use reverse repurchase agreements - during which the Fed sells a security to a counterparty with an agreement to repurchase that security in the future - to absorb large quantities of reserves.
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Bernanke Outlines Strategy For Unwinding Fed's Accommodative Policy
2/10/2010 10:44 AM ET
"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding," Bernanke said in prepared remarks.
He added, "We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively."
Though no timetable was given, Bernanke did outline specific strategies that the Fed could implement to unwind policy.
The central bank chief said that the Fed may move to a new benchmark target rate other than the federal funds rate.
In the testimony, prepared for a postponed hearing before the House Financial Services Committee, Bernanke said that the Fed may raise interest rates on reserves first, in order to put pressure on short term rates, and added that the Fed is also considering raising the discount rate in the near future.
"By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks," he said.
He did say, though, that no decision has been made on the issue, and that the Fed would eventually return to the federal funds rate as its operating target, if it were to focus elsewhere for a time.
Bernanke also outlined other additional tools the central bank would use to reduce the reserves held by the banking system.
"Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates," he said.
The Fed chair went on to say that the central bank has enhanced its ability to use reverse repurchase agreements - during which the Fed sells a security to a counterparty with an agreement to repurchase that security in the future - to absorb large quantities of reserves.
1 2 Next Page
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Posted: 10 Feb 2010 07:44 AM PST
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Below is the prepared testimony of Federal Reserve Chairman Ben Bernanke to the House Financial Services Committee on the Fed's exit strategy from its easing policies.
While the House panel's hearing was postponed on Wednesday because of severe winter storms, the Fed released the prepared testimony.
Chairmen Frank and Watt, Ranking Members Bachus and Paul, and other members of the Committee and Subcommittee, I appreciate the opportunity to discuss the Federal Reserve's strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity.
Broadly speaking, the Federal Reserve's response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years has experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on the taxpayer, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit.(1) As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.
Second, after reducing short-term interest rates nearly to zero, the Federal Open Market Committee (FOMC) provided additional monetary policy stimulus through large-scale purchases of Treasury and agency securities. These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth. Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.
Liquidity Programs With the onset of the crisis in the late summer and fall of 2007, the Federal Reserve aimed to ensure that sound financial institutions had sufficient access to short-term credit to remain sufficiently liquid and able to lend to creditworthy customers, even as private sources of liquidity began to dry up. To improve the access of banks to backup liquidity, the Federal Reserve reduced the spread over the target federal funds rate of the discount rate--the rate at which the Fed lends to depository institutions through its discount window--from 100 basis points to 25 basis points, and extended the maximum maturity of discount window loans, which had generally been limited to overnight, to 90 days.
Many banks, however, were evidently concerned that if they borrowed from the discount window, and that fact somehow became known to market participants, they would be perceived as weak and, consequently, might come under further pressure from creditors. To address this so-called stigma problem, the Federal Reserve created a new discount window program, the Term Auction Facility (TAF). Under the TAF, the Federal Reserve has regularly auctioned large blocks of credit to depository institutions. For various reasons, including the competitive format of the auctions, the TAF has not suffered the stigma of conventional discount window lending and has proved effective for injecting liquidity into the financial system.(2)
Liquidity pressures in financial markets were not limited to the United States, and intense strains in the global dollar funding markets began to spill over to U.S. markets. In response, the Federal Reserve entered into temporary currency swap agreements with major foreign central banks. Under these agreements, the Federal Reserve provided dollars to foreign central banks in exchange for an equally valued quantity of foreign currency; the foreign central banks, in turn, lent the dollars to banks in their own jurisdictions. The swaps helped reduce stresses in global dollar funding markets, which in turn helped to stabilize U.S. markets. Importantly, the swaps were structured so that the Federal Reserve bore no foreign exchange risk or credit risk.(3)
As the financial crisis spread, the continuing pullback of private funding contributed to the illiquid and even chaotic conditions in financial markets and prompted runs on various types of financial institutions, including primary dealers and money market mutual funds.(40 To arrest these runs and help stabilize the broader financial system, the Federal Reserve used its emergency lending authority under Section 13(3) of the Federal Reserve Act--an authority not used since the Great Depression--to provide short-term backup funding to certain nondepository institutions through a number of temporary facilities.(5)
For example, in March 2008 the Federal Reserve created the Primary Dealer Credit Facility, which lent to primary dealers on an overnight, overcollateralized basis. Subsequently, the Federal Reserve created facilities that proved effective in helping to stabilize other key institutions and markets, including money market mutual funds, the commercial paper market, and the asset-backed securities market.
As was intended, use of many of the Federal Reserve's lending facilities has declined sharply as financial conditions have improved.(6) Some facilities were closed over the course of 2009, and most other facilities expired at the beginning of this month. As of today, the only facilities still in operation that offer credit to multiple institutions, other than the regular discount window, are the TAF (the auction facility for depository institutions) and the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those that are backed by auto loans, credit card loans, small business loans, and student loans. These two facilities will also be phased out soon: The Federal Reserve has announced that the final TAF auction will be conducted on March 8, and the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.(7)
In addition, the Federal Reserve is in the process of normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans to 28 days, from 90 days, and we will consider whether further reductions in the maximum loan maturity are warranted. Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.
Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction.
This posting includes an audio/video/photo media file: Download Now
Below is the prepared testimony of Federal Reserve Chairman Ben Bernanke to the House Financial Services Committee on the Fed's exit strategy from its easing policies.
While the House panel's hearing was postponed on Wednesday because of severe winter storms, the Fed released the prepared testimony.
Chairmen Frank and Watt, Ranking Members Bachus and Paul, and other members of the Committee and Subcommittee, I appreciate the opportunity to discuss the Federal Reserve's strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity.
Broadly speaking, the Federal Reserve's response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years has experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on the taxpayer, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit.(1) As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.
Second, after reducing short-term interest rates nearly to zero, the Federal Open Market Committee (FOMC) provided additional monetary policy stimulus through large-scale purchases of Treasury and agency securities. These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth. Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.
Liquidity Programs With the onset of the crisis in the late summer and fall of 2007, the Federal Reserve aimed to ensure that sound financial institutions had sufficient access to short-term credit to remain sufficiently liquid and able to lend to creditworthy customers, even as private sources of liquidity began to dry up. To improve the access of banks to backup liquidity, the Federal Reserve reduced the spread over the target federal funds rate of the discount rate--the rate at which the Fed lends to depository institutions through its discount window--from 100 basis points to 25 basis points, and extended the maximum maturity of discount window loans, which had generally been limited to overnight, to 90 days.
Liquidity pressures in financial markets were not limited to the United States, and intense strains in the global dollar funding markets began to spill over to U.S. markets. In response, the Federal Reserve entered into temporary currency swap agreements with major foreign central banks. Under these agreements, the Federal Reserve provided dollars to foreign central banks in exchange for an equally valued quantity of foreign currency; the foreign central banks, in turn, lent the dollars to banks in their own jurisdictions. The swaps helped reduce stresses in global dollar funding markets, which in turn helped to stabilize U.S. markets. Importantly, the swaps were structured so that the Federal Reserve bore no foreign exchange risk or credit risk.(3)
As the financial crisis spread, the continuing pullback of private funding contributed to the illiquid and even chaotic conditions in financial markets and prompted runs on various types of financial institutions, including primary dealers and money market mutual funds.(40 To arrest these runs and help stabilize the broader financial system, the Federal Reserve used its emergency lending authority under Section 13(3) of the Federal Reserve Act--an authority not used since the Great Depression--to provide short-term backup funding to certain nondepository institutions through a number of temporary facilities.(5)
For example, in March 2008 the Federal Reserve created the Primary Dealer Credit Facility, which lent to primary dealers on an overnight, overcollateralized basis. Subsequently, the Federal Reserve created facilities that proved effective in helping to stabilize other key institutions and markets, including money market mutual funds, the commercial paper market, and the asset-backed securities market.
As was intended, use of many of the Federal Reserve's lending facilities has declined sharply as financial conditions have improved.(6) Some facilities were closed over the course of 2009, and most other facilities expired at the beginning of this month. As of today, the only facilities still in operation that offer credit to multiple institutions, other than the regular discount window, are the TAF (the auction facility for depository institutions) and the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those that are backed by auto loans, credit card loans, small business loans, and student loans. These two facilities will also be phased out soon: The Federal Reserve has announced that the final TAF auction will be conducted on March 8, and the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.(7)
In addition, the Federal Reserve is in the process of normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans to 28 days, from 90 days, and we will consider whether further reductions in the maximum loan maturity are warranted. Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.
This posting includes an audio/video/photo media file: Download Now
Posted: 10 Feb 2010 07:37 AM PST
Message from fivefilters.org: If you can, please donate to the full-text RSS service so we can continue developing it.
Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction.
This posting includes an audio/video/photo media file: Download Now
Online investing is becoming more than a cheap way to trade stocks. Today, one can buy such alternatives as bonds, options, futures and precious metals online, set up trades in the quiet of the night and, that done, leave the day for other things.
"The profile of our average investor has changed over the last five years from a person, typically male, around 30-something and with a type-A personality to people who want more -- long-term investment plans and a wider product offering," says Jason Storsley, president and chief executive of RBCDirect Investing in Toronto.
Online brokers have responded to this hungry do-it-yourself investor with a wider variety of products beyond stocks.
"We have fixed-income products that range from government and corporate bonds to a large selection of GICs to commercial paper and bankers acceptances. We also have mutual funds -- most are no loads," says Mr. Storsley.
The move to self-directed investing is a form of unbundling of services that has typically been offered by full-service brokers. The full-service broker provides counsel, advice, encouragement and -- depending on the relationship -- some services that have traditionally been done by fiduciaries acting for large estates.
Hand-holding is something that the online brokerages do not offer. While their core trading services may also include some research, red-carpet receptions and eye-to-eye meetings are not part of the package.
"Taking the client out to lunch is not in the tool kit of the discount brokers," says Caroline Nalbantoglu, a financial planner with PWL Advisors Inc. in Montreal. "Online brokers provide bare-bones services for the reduced fees they charge."
Yet, they are making up for what they lack in services with an expanding range of online products. Duncan Hannay, managing director and head of online brokerage at Bank of Nova Scotia, says it's not just about low fees anymore -- it's about giving investors more control over their trades.
Like other online dealers, Scotiabank's iTRADE online service offers a wide range of bonds and money market products. As well, it offers clients a first crack at initial public offerings, including new mutual funds, ETFs and stock offerings.
For investors who want to trade metallic gold or gold coins, it's possible to have an online account with precious metals dealer ScotiaMocatta, a unit of Bank of Nova Scotia, through its eStore. The online-trading service allows clients to purchase physical precious metals, including gold, silver, platinum and palladium. Precious metals certificates can be held in a Scotia iTRADE account, he adds.
The typical iTRADE client is no longer a frequent trader, he says. "The larger category is affluent investors. They have $50,000 in investible assets but make less than 30 trades per quarter. Meanwhile, frequent traders represent a declining share of iTRADE's total business," Mr. Hannay says.
But there are limits to what is offered online. Neither iTRADE nor other online brokers handle private placements nor the traditional alternative investment --hedge funds, he notes.
An investor can find a wider range of investment products by shopping the Canadian arms of U. S online brokers. For example, OptionsXpressCanada offers trading in stocks, bonds, money market products such as U.S. T-bills and U.S. T-bonds and futures contracts traded on U.S. exchanges. The possible trades include agricultural products but not foreign-exchange contracts. The company, which is traded on Nasdaq as OXPS, cannot trade any assets not listed on U.S. markets.
Alternative investments are a growing fraction of total online business, says Cesar Rainusso, vice-president for strategy and product development with BMOInvestor-Line, the online brokerage service of BMO Financial Group. "In the last year, fixed income has been a growing part of our business," he says. "Market uncertainty has driven investors to short-term fixed-income products."
The widening of product offerings raises a significant question: Is it appropriate for investors to build their own financial structures of stocks and alternative investments via self-directed online brokers?
Conventional theories of asset management say the investor can reduce risk and increase return by diversifying asset classes. Bonds and commodity futures are asset classes beyond stocks. But the theory of the efficient frontier, as the concept is called, assumes that the investor knows the product and the market well.
Financial planner Adrian Mastracci, head of KCM Wealth Management Inc. in Vancouver, points out that there are sophisticated investors able to do their own financial plans and to execute them. But he adds the qualifications to manage deconstructed financial services, especially with assets other than stocks, are demanding.
"The investor has to have extensive knowledge of asset management, be able to do research in each market, handle risk analysis, be fluent in the issues in retirement planning, be able to work with asset allocation and, of course, has to know how asset classes other than stocks work. It is a long list for the investor who wants to do his own work and do it well."
"The profile of our average investor has changed over the last five years from a person, typically male, around 30-something and with a type-A personality to people who want more -- long-term investment plans and a wider product offering," says Jason Storsley, president and chief executive of RBCDirect Investing in Toronto.
Online brokers have responded to this hungry do-it-yourself investor with a wider variety of products beyond stocks.
"We have fixed-income products that range from government and corporate bonds to a large selection of GICs to commercial paper and bankers acceptances. We also have mutual funds -- most are no loads," says Mr. Storsley.
The move to self-directed investing is a form of unbundling of services that has typically been offered by full-service brokers. The full-service broker provides counsel, advice, encouragement and -- depending on the relationship -- some services that have traditionally been done by fiduciaries acting for large estates.
Hand-holding is something that the online brokerages do not offer. While their core trading services may also include some research, red-carpet receptions and eye-to-eye meetings are not part of the package.
"Taking the client out to lunch is not in the tool kit of the discount brokers," says Caroline Nalbantoglu, a financial planner with PWL Advisors Inc. in Montreal. "Online brokers provide bare-bones services for the reduced fees they charge."
Yet, they are making up for what they lack in services with an expanding range of online products. Duncan Hannay, managing director and head of online brokerage at Bank of Nova Scotia, says it's not just about low fees anymore -- it's about giving investors more control over their trades.
Like other online dealers, Scotiabank's iTRADE online service offers a wide range of bonds and money market products. As well, it offers clients a first crack at initial public offerings, including new mutual funds, ETFs and stock offerings.
For investors who want to trade metallic gold or gold coins, it's possible to have an online account with precious metals dealer ScotiaMocatta, a unit of Bank of Nova Scotia, through its eStore. The online-trading service allows clients to purchase physical precious metals, including gold, silver, platinum and palladium. Precious metals certificates can be held in a Scotia iTRADE account, he adds.
The typical iTRADE client is no longer a frequent trader, he says. "The larger category is affluent investors. They have $50,000 in investible assets but make less than 30 trades per quarter. Meanwhile, frequent traders represent a declining share of iTRADE's total business," Mr. Hannay says.
But there are limits to what is offered online. Neither iTRADE nor other online brokers handle private placements nor the traditional alternative investment --hedge funds, he notes.
An investor can find a wider range of investment products by shopping the Canadian arms of U. S online brokers. For example, OptionsXpressCanada offers trading in stocks, bonds, money market products such as U.S. T-bills and U.S. T-bonds and futures contracts traded on U.S. exchanges. The possible trades include agricultural products but not foreign-exchange contracts. The company, which is traded on Nasdaq as OXPS, cannot trade any assets not listed on U.S. markets.
Alternative investments are a growing fraction of total online business, says Cesar Rainusso, vice-president for strategy and product development with BMOInvestor-Line, the online brokerage service of BMO Financial Group. "In the last year, fixed income has been a growing part of our business," he says. "Market uncertainty has driven investors to short-term fixed-income products."
The widening of product offerings raises a significant question: Is it appropriate for investors to build their own financial structures of stocks and alternative investments via self-directed online brokers?
Conventional theories of asset management say the investor can reduce risk and increase return by diversifying asset classes. Bonds and commodity futures are asset classes beyond stocks. But the theory of the efficient frontier, as the concept is called, assumes that the investor knows the product and the market well.
Financial planner Adrian Mastracci, head of KCM Wealth Management Inc. in Vancouver, points out that there are sophisticated investors able to do their own financial plans and to execute them. But he adds the qualifications to manage deconstructed financial services, especially with assets other than stocks, are demanding.
"The investor has to have extensive knowledge of asset management, be able to do research in each market, handle risk analysis, be fluent in the issues in retirement planning, be able to work with asset allocation and, of course, has to know how asset classes other than stocks work. It is a long list for the investor who wants to do his own work and do it well."
This posting includes an audio/video/photo media file: Download Now
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