February 28th, 2011
By: Allison Bennett and Lukanyo Mnyanda
The dollar fell to its lowest since November against the currencies of six U.S. trade partners on bets Federal Reserve Chairman Ben S. Bernanke will signal to Congress the central bank plans to maintain economic stimulus.
The euro rose against the dollar on speculation European Central Bank President Jean-Claude Trichet may indicate this week a readiness to increase borrowing costs. Sweden’s krona climbed to a 30-month high after Riksbank Governor Stefan Ingves said the central bank may boost interest rates at every meeting this year. Canada’s currency reached a three-year high versus the greenback.
“The FX market will want to see the juxtaposition between Bernanke and Trichet this week,” said Greg Anderson, a currency strategist at Citigroup Inc. in New York. “The Riksbank comments are pretty critical and if you think that’s reflective of what the ECB and Bank of England would say and do, you’ve got to be pricing in more hawkishness on that side of the Atlantic than this side.”
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies including the euro and yen, decreased as much as 0.7 percent to 76.756, the lowest level since Nov. 9, before trading at 76.801 at 10:20 a.m. in New York, compared with 77.275 on Feb. 25. The gauge has fallen 1.2 percent in February.
The dollar remained lower versus most major peers even after the Institute for Supply Management-Chicago Inc.’s business barometer unexpectedly rose to 71.2 this month, the highest level since July 1988, from 68.8 in January.
Consumer Spending Falls
U.S. consumer spending rose less than forecast in January, accelerating 0.2 percent amid increasing fuel and food costs, data from the Commerce Department showed today. Another report showed European inflation stayed above the ECB’s 2 percent target for a second month in January.
The Swedish krona appreciated as much as 2 percent to 6.2934 versus the dollar, the strongest level since August 2008, on the outlook for higher interest rates. It traded at 6.2954.
There is “an increased probability that the repo rate will be raised at all of the monetary policy meetings held this year,” Ingves said in the minutes of the bank’s Feb. 14 meeting, published today. The Riksbank raised its benchmark repo rate this month for a fifth time since July, to 1.5 percent.
The krona appreciated 1.5 percent to 8.7093 per euro, from 8.8353 on Feb. 25. It has climbed 4.9 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, which track the currencies of 10 developed nations. The euro has risen 1.3 percent, while the dollar has lost 2.3 percent.
An ECB governing council member, Mario Draghi, said on Feb. 26 that inflation pressures are forcing policy makers to focus more closely on the timing of future interest-rate increases.
The ECB, which has kept its key interest rate at 1 percent since May 2009, will hold its next policy meeting on March 3.
The 17-nation euro gained 0.5 percent to $1.3827, extending its monthly advance to 1 percent, and rose 0.7 percent to 113.16 yen. It was up for the first time in three days against the Swiss franc, gaining 0.4 percent to 1.2824. Japan’s currency slid 0.2 percent to 81.85 per dollar.
Bernanke is scheduled to deliver the Fed’s semiannual report on monetary policy to the Senate Banking Committee tomorrow and is due to testify before the House Financial Services Committee on the following day.
Fed Policy Makers
The Federal Open Market Committee affirmed last month plans to continue its program of buying $600 billion of Treasuries through June even as policy makers increased their projections for U.S. growth this year. The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008.
Oil prices at almost a 29-month high and concern political turmoil that cut Libya’s output will spread have curtailed demand for currencies related to economic growth.
“We’ve had a pause for breath after the events of the past few days,” said Jeremy Stretch, executive director of foreign- exchange strategy at Canadian Imperial Bank of Commerce in London. While political instability in the Middle East “hasn’t spiraled out of control,” there are “still enough headwinds out there to be wary,” he said.
Crude oil for April delivery rose as much 2.1 percent to $99.96 a barrel in New York before trading at $97.29. It rose last week to $103.41, the highest level since September 2008.
Canada’s dollar touched its strongest level against the dollar since Feb. 28, 2008, after a government report showed the nation’s economy grew at a 3.3 percent annual pace in the fourth quarter, more than economists forecast.
The currency was headed for a 2.8 percent rally this month before tomorrow’s meeting of the Bank of Canada, which has expressed concern that its strength may stall growth.
Canada’s dollar appreciated 0.4 percent to 97.40 cents per U.S. dollar, from 97.74 on Feb. 25. It touched 97.28 cents.
July 22, 2010
Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economic outlook remains “unusually uncertain,” and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.
Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the economy. He repeated a pledge to keep them there for an “extended period.” Bernanke downplayed the odds that the economy will slide back into a “double-dip” recession. But he acknowledged the economy is fragile.
Given that, the Fed is “prepared to take further policy actions as needed” to keep the recovery on track, he said. Bernanke said Fed policymakers haven’t settled on “leading options” but they are being explored. Those options include lowering the rate the Fed pays banks to keep money parked at the Fed, strengthening the pledge to hold rates at record lows and reviving some crisis-era programs, Bernanke said.
“If the recovery seems to be faltering, we have to at least review our options,” Bernanke told lawmakers. However, he added later: “We are not prepared to take any specific steps in the near term” because the Fed is still evaluating the strength of the recovery.
Bernanke is trying to send Congress, Wall Street and Main Street a positive message that the recovery will last in the face of growing threats. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary.
Wall Street wasn’t convinced. Shortly before Bernanke spoke, the Dow Jones industrial average was up about 20 points. Within minutes, stocks began falling and the Dow was down more than 145 points.
The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.
Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.
“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, D-Conn. And, Sen. Richard Shelby of Alabama, the highest-ranking Republican on the panel, said the economic outlook has become a “bit more cloudy.”
With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going. Bernanke and his Fed colleagues have cut their forecasts for growth this year.
If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed or lower the rate banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.
Bernanke said the debt crisis in Europe, which has rattled Wall Street, played a role in the Fed’s “somewhat weaker outlook.” Although financial markets have improved considerably since the depth of the financial crisis in the fall of 2008, conditions have become “less supportive of economic growth in recent months,” he explained.
As a result, Bernanke said progress in reducing the nation’s unemployment rate, now at 9.5 percent, is now expected to be “somewhat slower” than thought. Unemployment is expect to stay high, in the 9 percent range, through the end of this year, under the Fed’s forecast.
High unemployment is a drag on household spending, Bernanke said, although he believed both consumers and businesses would spend enough to keep the recovery intact.
Bernanke also said it would take a “significant amount of time” to restore the nearly 8.5 million jobs wiped out over 2008 and 2009.
And, Bernanke said the housing market remains “weak” and noted that the overhang of vacant or foreclosed houses are weighing on home prices and home construction.
Given the weak recovery, inflation is not a problem, Bernanke said. However, Bernanke didn’t talk about deflation, a prolonged and destabilizing drop in prices for goods, the values of stocks and homes and in wages. Although most economists think the prospects of deflation are remote, some Fed officials have expressed concern about it.
To strengthen the economy, many economists predict the Fed will hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012. Doing so, would help nip any deflationary forces.
And keeping that bank rate at super low levels also would mean rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans would stay at their lowest point in decades.
Ultra-low lending rates, however, haven’t done much lately to rev up the economy. Consumers and businesses are cautious and aren’t showing an appetite to spend as lavishly as they usually do in the early stages of economic recoveries.
Bernanke, meanwhile, welcomed Congress’ new revamp of financial regulations signed into law by President Barack Obama on Wednesday. The new law, he said, “will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.”
November 30, 2009
By Craig Torres
Federal Reserve Chairman Ben S. Bernanke said curbing the central bank’s authority to supervise the banking system and tampering with its independence would “seriously impair” economic stability in the U.S.
“A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions,” the Fed chairman said in a commentary in today’s Washington Post. The measures “would seriously impair the prospects for economic and financial stability in the U.S.”
Bernanke has presided over the most expansive use of Fed powers since the Great Depression. While the 55-year-old Fed chairman has said he averted a financial meltdown, lawmakers have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantling of Fed authority since the creation of the institution in 1913.
Bernanke’s commentary is his first comprehensive answer to proposals in the House and Senate that would limit the Fed’s supervisory powers and exert more political oversight in the setting of interest rates. The issues are likely to be discussed when he faces the Senate Banking Committee on Dec. 3 for a hearing on his nomination to a second term as chairman.
“In the current environment with so much borrowing by the government, the political pressure on the Fed is out there,” said James Glassman, senior economist at JPMorgan Chase & Co. “I don’t think you can totally dismiss it.”
Senate Banking Committee Christopher Dodd, a Democrat from Connecticut, has criticized the central bank for lax supervision and introduced legislation this month that would strip bank oversight from the Fed and create a single bank regulator. Dodd would also limit the central bank’s ability to loan to individual companies.
“There is a strong case for a continued role for the Federal Reserve in bank supervision,” Bernanke said. “Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks.”
The Fed chairman pointed to capital adequacy tests the Fed performed in May which helped restore confidence in the banking system. The Standard and Poor’s 500 Financials Index has increased 34 percent since May 1, outperforming the S&P 500 by about 10 percentage points.
“The Fed has done a very remarkable job managing the financial crisis and the recovery of the financial markets is a testimony to that,” Glassman said. “Of all the things to ‘fix,’ why would we tamper with the one that actually has worked well?”
Dodd and Representative Barney Frank, chairman of the House Financial Services Committee, want to take away the Fed’s rule- writing power on consumer financial products and give it to a new Consumer Financial Protection Agency.
“The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis,” Bernanke said. The Fed has reviewed its performance and “moved aggressively to fix the problems,” he added.
As the subprime mortgage crisis began to trigger losses in bank portfolios, Bernanke used emergency authority last year to purchase securities from Bear Stearns Cos. and facilitate its merger with JPMorgan Chase & Co.
The Fed chairman said that the government’s actions, while in some instances “distasteful and unfair,” were necessary to prevent “a global economic catastrophe that could have rivaled the Great Depression in length and severity.”
Bernanke pushed the Fed’s backstop lending beyond banks, setting up programs to support the commercial paper and asset- backed securities markets. The Fed Board approved the bank- holding-company applications of Goldman Sachs Group Inc. and Morgan Stanley, giving them access to the Fed’s loan window.
The former Princeton University economist and Great Depression scholar has more than doubled the Fed’s assets to $2.21 trillion and become the lender of last resort to government bond dealers, banks, Wall Street firms and U.S. corporations. The central bank has also propped up markets for mortgage-backed and asset-backed securities that support credit to consumers, small businesses and commercial real estate.
Support for Attack
“Congress has a lot of public support for an attack on the Fed,” Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said in an interview Nov. 23. “They bailed out everybody in sight.”
A financial regulatory reform bill proposed by Frank, a Democrat from Massachusetts, would limit Fed emergency lending to broadly available credit programs.
The Frank bill preserves the Obama administration’s proposal to make the Fed the lead regulator of risk across the financial system.
The central bank’s independence is also under fire from both chambers of Congress. Frank’s committee advanced a proposal this month to remove a three-decade ban on congressional audits of Fed interest-rate decisions. The proposal was offered by Representative Ron Paul, a Republican from Texas, and based on a bill with more than 300 co-sponsors.
Bernanke said studies show that central banks independent of political influence tend to keep inflation and interest rates lower than their less independent counterparts.
“The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation,” Bernanke said.
Under the proposal by Dodd, commercial banks would lose their power to appoint directors of the 12 regional Fed banks. Instead, directors would be chosen by the Fed’s Senate-confirmed governors, and each board chairman would be appointed by the president of the United States and subject to Senate approval.
The proposal would increase political oversight of the Fed bank presidents, who are among the most vocal proponents on the Federal Open Market Committee for keeping inflation low.
“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation,” Bernanke said.
Policy makers cut the benchmark lending rate to a range of zero to 0.25 percent almost a year ago and this month reiterated a pledge to keep the policy rate low for “an extended period.”
While the economy expanded at a 2.8 percent annual pace in the third quarter, unemployment jumped to 10.2 percent in October. The Fed’s challenge is to support growth without unleashing expectations of higher inflation prompted by aggressive monetary stimulus.
“The ultimate goal of all our efforts is to restore and sustain economic prosperity,” Bernanke said. “Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures.”