A good artile to share with you. It gave good hints on the financial market, the direction of mortgage rates.....
WASHINGTON (AP) -- When the financial system was teetering, Federal Reserve Chairman Ben Bernanke flooded it with trillions of dollars to save the banks and free up credit for consumers and businesses.
Looming in the future is a high-risk challenge for the economy's rescuer-in-chief: He will have to mop up that money without disrupting a nascent recovery.
And timing is vital. Act too fast, and Bernanke risks choking off lending to businesses and everyday Americans. Wait too long, and he risks setting off crippling inflation.
''We are in such an unusual situation,'' said Lyle Gramley, a Fed member in the early 1980s and now chief economic strategist at Soleil Securities Corp. ''The Fed will have a more difficult set of decisions to make.''
Assuming he manages to help usher in a sustained recovery, Bernanke, like his predecessors, will eventually face still another challenge: He will be under enormous political pressure to keep interest rates low, even though that could speed inflation.
But the Fed chief will face no task with quite the peril of withdrawing the trillions the Fed has pumped into the financial system in ways that had never been envisioned.
That money helped prop up shaky banks. It also was intended to unlock lending to people and companies, a key component of any recovery but one that so far has had only spotty success.
When, precisely, to pull back the money is an issue sure to surface as Bernanke, his counterparts in other countries, academics and economists meet over the next couple of days at an annual Fed conference in Jackson Hole, Wyo.
Some analysts think it could take four or five years for the Fed to withdraw the money entirely and shrink a balance sheet that is now about $2 trillion, more than double what it was when the financial crisis struck.
Already, the Fed has taken baby steps.
It has said it will allow one program intended to support money market mutual funds -- one that hasn't even been used -- to expire Oct. 30. It's also reduced the maximum it will lend to banks under two other programs.
And earlier this month, the central bank signaled it won't extend past October a $300 billion government debt-buying program. That program is intended to lower consumer and corporate loan rates.
But this week the Fed extended a separate program designed to increase lending and help the commercial real estate market. So far, about $40 billion in loans has been extended to investors -- a small fraction of the $200 billion made available in the program's first phase. And Americans still have trouble getting loans.
The biggest decisions lie ahead.
One will be deciding when and how to unload $1.25 trillion in Fannie Mae and Freddie Mac mortgage-backed securities without sending mortgage rates surging. Another delicate matter is when the Fed should start selling some of its $300 billion in Treasury debt.
In fighting the recession and financial crisis, Bernanke unleashed some of the most aggressive actions in the history of the central bank, which was created in 1913 after a series of bank panics.
He slashed interest rates to record lows near zero. He provided low-cost loans for banks and bought debt so companies would have short-term ''commercial paper'' loans available to pay for salaries and supplies.
The Fed also bought mortgage-backed securities and government bonds to drive down interest rates on mortgages and other consumer debt. Bernanke also moved to support the mutual fund industry.
Congress, the White House and statehouses across America will probably exert intense pressure on the Fed to keep the money flowing and the emergency aid programs operating.
''There's no question the Fed has the capacity to reel in the stimulus. It is the politics that trouble me,'' says Allan Meltzer, a professor at Carnegie-Mellon University and author of a history of the central bank.
Keeping the easy money in place too long could feed high inflation by encouraging overborrowing and overspending. Surging inflation could then derail a recovery if it caused the Fed to aggressively boost interest rates.
But pulling the plug too soon on the Fed's emergency aid could set back a recovery even faster. If, for instance, the Fed dumped its mortgage securities and interest rates shot up, homeowners and the housing industry would take a further pounding.
Whenever it does sell those holdings, the Fed will have to pace the sales so they don't jolt the market but rather cause a smooth, gradual rise in mortgage rates.
To prevent inflation from surging, many economists also think the Fed will have to start raising its key bank lending rate next summer. Unemployment, now 9.4 percent, will probably still be high, perhaps in the double digits.
Higher interest rates could hurt Americans not long before they vote in midterm congressional elections next year. But often, there's no alternative.
A Bernanke predecessor, Paul Volcker, was credited with ending 1970s ''stagflation,'' a toxic mix of stagnant economic activity and inflation, by ratcheting up interest rates to their highest levels since the Civil War.
Those high rates helped produce the recession that drove unemployment to its postwar high of 10.8 percent. Protesting farmers drove tractors into Washington, surrounding the Fed's stately headquarters. Angry homebuilders delivered two-by-fours to the Fed.
Sen. Jim Bunning, R-Ky., asked Bernanke last month whether he had the will, as Volcker had, to tighten interest rates even if the economy is weak. The Fed chief said he was prepared to make unpopular moves if they are in the best interest of the economy.
A skeptical Bunning replied, ''I wish you good luck.''
Source:
By THE ASSOCIATED PRESS
Published: August 20, 2009