The US Fed Will Keep Interest Rates At Zero For As Long As It Takes-This Will Imply big Asset Bubbles in Asia and South America As Free Money Chases Returns JACKSON HOLE, Wyo. — The Federal Reserve chairman, Ben S. Bernanke, signaled once again on Friday that the central bank was prepared to act if the economy continued to weaken, as yet another economic report confirmed that the recovery had slowed to a crawl. Mr. Bernanke made clear that while the Fed could take various steps, including large purchases of government debt, "central bankers alone cannot solve the world's economic problems." Speaking at the Fed's annual symposium here, he hinted broadly that political leaders had to take steps to tackle the deficit and the trade imbalance. Hours before Mr. Bernanke spoke, the Commerce Department lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth from April through June was 2.4 percent. Economists had been predicting a steeper decline, and stock prices rose after the markets opened. While Mr. Bernanke announced no new steps that the Fed would take immediately, he said the central bank was determined to prevent the economy from slipping into a cycle of falling wages and prices, a situation he said he did not think was likely. Instead he predicted that growth would continue modestly in the second half of the year and pick up in 2011. Mr. Bernanke said the Fed, having kept short-term interest rates at nearly zero since 2008, had essentially four options: It can purchase more government debt and long-term securities. It can try to coax down long-term interest rates by announcing its intention to keep short-term rates extremely low for even longer than the markets currently expect. It can lower the interest rate it pays on the funds banks hold at the Fed. And it can raise its medium-term target for inflation, which would discourage banks from sitting on their cash. Mr. Bernanke suggested that the first of those options was the most likely, and all but ruled out the last two. While the Fed committee that sets monetary policy was prepared to take new steps "if the outlook were to deteriorate significantly," he said, it "has not agreed on specific criteria or triggers for further action." As Mr. Bernanke's remarks were released publicly, stock prices immediately fell, a sign that investors were hoping for some concrete signs that the Fed would step in to try to bolster the economy. But as the market digested the chairman's full remarks, prices rebounded and the Dow Jones industrial average rose 164.84 points, or 1.65 percent, to 10,150.65. The yield on the benchmark 10-year Treasury note rose to 2.64 percent, from 2.48 percent. The revised second-quarter growth data came after a week that showed that the economic retrenchment that began in the second quarter had spilled into the summer, with a sharp slowdown in new-home sales and a drop in sales of factory goods. Consumer spending rose 2 percent in the second quarter — slightly better than the Commerce Department had initially projected. And a closely watched survey by the University of Michigan and Thomson Reuters showed that consumer sentiment ticked up marginally in August, while remaining well below levels seen during the previous six months. In his first public remarks since the Fed took a modest step on Aug. 10 to lift the economy — a decision to invest proceeds from its huge mortgage-bond portfolio in long-term Treasury securities — Mr. Bernanke tried in some respects to dampen expectations that the Fed could make significant headway against the economic sluggishness. Alan S. Blinder, a former Fed vice chairman and a Princeton professor, noted that Mr. Bernanke focused his remarks on the costs as well as the benefits of additional action to help the economy. "The Fed has run out of the strong tools, and is turning to the weak ones," Mr. Blinder said in an interview here. "When you're fighting in a foxhole and you've used up the machine guns and hand grenades, then you pull out the swords and start throwing rocks." Mr. Blinder said that the economy seemed "substantially worse" than it did three months ago — and that Mr. Bernanke had acknowledged the deterioration, cautiously. The Obama administration is looking to the Fed to do more to spur the recovery, since its own options are few, given the political paralysis in Congress as midterm elections approach. President Obama, vacationing on Martha's Vineyard, discussed the economy for about 15 minutes with Mayor Michael R. Bloomberg of New York before the two men played golf. Mr. Bernanke avoided wading into the rancorous political debates over fiscal policy, instead focusing on the two objectives that form the Fed's legal mandate: price stability and maximum employment. Inflation has been running well below the Fed's unofficial target rate of 1.5 to 2 percent. While conceding that inflation had fallen "slightly below" the desirable level, Mr. Bernanke said deflation was "not a significant risk" right now. He said the Fed would "strongly resist deviations from price stability in the downward direction." Mr. Bernanke predicted the economy would continue to grow the rest of this year, "albeit at a relatively modest pace." He said the "preconditions for a pickup of growth in 2011 appear to remain in place," as banks increase lending, worries over the European sovereign debt crisis abate and consumers save more. Strikingly, Mr. Bernanke acknowledged that the traditional tradeoff between inflation and employment had become all but obsolete, at least for now. "There is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability," he said. Mr. Bernanke explained in detail the Fed's decision to use money from its mortgage bonds to buy government debt. The Fed has gobbled up $1.25 trillion in mortgage-backed securities and $175 billion in debts owed by Fannie Mae and other government entities — a major reason mortgage rates are at historic lows. So far, the Fed has received about $140 billion through repayments of the principal on its holdings of those debts. An additional $400 billion or so could be repaid by the end of 2011. If the Fed had not taken the step it did, the central bank's balance sheet would have gradually shrunk, which would amount to a passive tightening of monetary policy — what Mr. Bernanke called "a perverse outcome." He said the Fed's purchases of longer-term securities had helped bring down long-term interest rates and lower the cost of borrowing, contributing to the modest recovery that began in the spring of 2009. However, such purchases seemed to be most effective in times of financial stress, and additional purchases would further complicate the Fed's future "exit strategy" when the time came to return to normal monetary policy, he said. The Fed has said since March 2009 that "exceptionally low" levels of the fed funds rate, the benchmark short-term interest rate, would be warranted for "an extended period." The Fed could try to lengthen those expectations, as central banks in Canada and Japan have tried. But Mr. Bernanke cautioned that the Fed might find it "difficult to convey the committee's policy intentions with sufficient precision and conditionality." The Fed currently pays 0.25 percent interest on excess reserves that banks keep at the Fed. But Mr. Bernanke said that slashing that rate even to zero might do no more than lower the fed funds rate by another 0.10 to 0.15 percentage points. He said doing so would harm the liquidity of short-term money markets. Mr. Bernanke said he saw "no support" on the committee for setting a higher inflation target, as some economists have suggested. He called the strategy "inappropriate for the United States in current circumstances." Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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http://in.groups.yahoo.com/group/investwise/
INVESTMENTS IN INDIA
We are low-risk, long-term investors.
Stocks, mutual funds and the entire investment gamut. Only financing/investment avenues in India will be discussed.
For any assistance, questions or improvement ideas, contact investwise-owner@yahoogroups.co.in
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