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By Dirk van Dijk of Zacks.com
NEW YORK (TheStreet) -- The keeping of the phrase "are likely to warrant exceptionally low levels of the federal funds rate for an extended period" in the Fed rate statement is key. This means that we will in all probability not see an increase in the Fed Funds rate until at least the end of the year. Aside from taking out references to the purchases of agency debt and agency mortgage-backed securities, which are now complete, this portion of the statement is identical to the one after the last meeting.
Importantly, there is no mention of how these securities will eventually come off of the Fed's balance sheet. Selling them would put upward pressure on mortgage rates, which is the last thing that the housing market needs now.
On the other hand, these are fairly long-term assets, so just waiting for them to roll off as people pay down their mortgages or refinance could take a very long time (more than seven years, most likely). I would expect a combination of slow sales and run off, but not starting the sales until next year.
As per the current Fed policy statement: Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a 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.
Tom Hoenig, the President of the Kansas City Fed, has been the lone dissenter for three meetings now. Given the huge amount of slack in the system, I think that Hoenig is not only wrong, but dangerously wrong.
The Fed should not even consider raising rates until capacity utilization, currently at 73.2% in total, gets much closer to its long-term average level of 80.6%. When it gets up to about 77% then it will be time to think about gradually raising rates. Similarly, we need to see the unemployment rate get down below 8% before starting a gradual (say 25 basis points per meeting) rise in rates.
Keeping short-term rates low should be good for the stock market, and is particularly helpful to the big banks like Bank of America (Symbol : BAC) and JPMorgan (Symbol : JPM). Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%.
On big enough sums of money, this can be very profitable, and will help to recapitalize the banking system (provided they don't drain capital by paying it out in dividends or frittering it away in outrageous bonuses to their top executives). Low interest rates will stimulate economic growth, which will help increase tax revenues and thus help (but not solve) the budget problems at all levels of government.
Not a lot of change from last meeting, but in this case, no change is good. Zacks.com Resources BANK OF AMERICA CORPORATION (Symbol : BAC) : Read the Full Research Report JP MORGAN CHASE & CO (JPM): Read the Full Research Report
© 1996-2010 TheStreet.com, Inc. All rights reserved.
Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
Fidelity Brokerage Services LLC Content marked with this symbol is provided by Fidelity Brokerage Services LLC (“FBS”), an SEC registered broker-dealer and member NYSE, SIPC. FBS makes available a full range of stocks, bonds, and mutual funds to individual and other investors through retirement and non-retirement accounts. FBS services its customers through local investor centers, regional telephone service centers and the internet. FBS is an affiliate of FICS.Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact Fidelity for a prospectus containing this information. Read it carefully.
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By Dirk van Dijk of Zacks.com
NEW YORK (TheStreet) -- The keeping of the phrase "are likely to warrant exceptionally low levels of the federal funds rate for an extended period" in the Fed rate statement is key. This means that we will in all probability not see an increase in the Fed Funds rate until at least the end of the year. Aside from taking out references to the purchases of agency debt and agency mortgage-backed securities, which are now complete, this portion of the statement is identical to the one after the last meeting.
Importantly, there is no mention of how these securities will eventually come off of the Fed's balance sheet. Selling them would put upward pressure on mortgage rates, which is the last thing that the housing market needs now.
On the other hand, these are fairly long-term assets, so just waiting for them to roll off as people pay down their mortgages or refinance could take a very long time (more than seven years, most likely). I would expect a combination of slow sales and run off, but not starting the sales until next year.
As per the current Fed policy statement: Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a 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.
Tom Hoenig, the President of the Kansas City Fed, has been the lone dissenter for three meetings now. Given the huge amount of slack in the system, I think that Hoenig is not only wrong, but dangerously wrong.
The Fed should not even consider raising rates until capacity utilization, currently at 73.2% in total, gets much closer to its long-term average level of 80.6%. When it gets up to about 77% then it will be time to think about gradually raising rates. Similarly, we need to see the unemployment rate get down below 8% before starting a gradual (say 25 basis points per meeting) rise in rates.
Keeping short-term rates low should be good for the stock market, and is particularly helpful to the big banks like Bank of America (Symbol : BAC) and JPMorgan (Symbol : JPM). Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%.
On big enough sums of money, this can be very profitable, and will help to recapitalize the banking system (provided they don't drain capital by paying it out in dividends or frittering it away in outrageous bonuses to their top executives). Low interest rates will stimulate economic growth, which will help increase tax revenues and thus help (but not solve) the budget problems at all levels of government.
Not a lot of change from last meeting, but in this case, no change is good. Zacks.com Resources BANK OF AMERICA CORPORATION (Symbol : BAC) : Read the Full Research Report JP MORGAN CHASE & CO (JPM): Read the Full Research Report
© 1996-2010 TheStreet.com, Inc. All rights reserved.
Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
Fidelity Brokerage Services LLC Content marked with this symbol is provided by Fidelity Brokerage Services LLC (“FBS”), an SEC registered broker-dealer and member NYSE, SIPC. FBS makes available a full range of stocks, bonds, and mutual funds to individual and other investors through retirement and non-retirement accounts. FBS services its customers through local investor centers, regional telephone service centers and the internet. FBS is an affiliate of FICS.Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact Fidelity for a prospectus containing this information. Read it carefully.
If you like this article,
Digg it now.
What is Digg?
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Add Top News to your third-party personal homepage (opens in new window).
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By Dirk van Dijk of Zacks.com
NEW YORK (TheStreet) -- The keeping of the phrase "are likely to warrant exceptionally low levels of the federal funds rate for an extended period" in the Fed rate statement is key. This means that we will in all probability not see an increase in the Fed Funds rate until at least the end of the year. Aside from taking out references to the purchases of agency debt and agency mortgage-backed securities, which are now complete, this portion of the statement is identical to the one after the last meeting.
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