• Home ::
• Fundamental ::
• Analysis Reports ::
• Daily Global Commentary

• Send
• Print
• Add To
• Rss

Daily Global Commentary

41601dbe-c330-4869-9f5c-c6bd73567f86

7

0

Fed Institutes Two More Programs to Support Working of Financial Markets

Tue, Nov 25 2008, 22:17 GMT
by Northern Trust Economic Research Department

Northern Trust

Fed Institutes Two More Programs to Support Working of Financial Markets

The Federal Reserve announced the creation of Term Asset-Backed Securities Loan Facility (TALF) in conjunction with the Treasury. The program that will involve the Federal Reserve Bank of New York lending up to $200 billion to holders of AAA-rated asset backed securities “backed by newly and recently originated consumer and small business loans.” The U.S. Treasury Department, under the Emergency Economic Stabilization Act of 2008, will provide $20 billion of credit protection to the Federal Reserve Bank of New York for these non-recourse loans. The loans will involve a haircut based on the asset class and there is fee for participation. This new program is designed to address problems in the auto, student, credit card, and Small Business Administration guaranteed loans. Loans to consumers have become scarce because securitization of consumer loans has come to a standstill. Funding these loans should result in a resumption of the working of these markets. A date and details are being worked out.

The Fed also announced it will start purchasing Government Sponsored Enterprises (GSE) – Fannie Mae, Freddie Mac, and Federal Home Loan Banks – this week. Spreads of these securities vis-à-vis Treasury securities have widened sharply (see chart 1) in recent days. Purchases of $100 billion in GSE direct obligations and $500 of Mortgage Backed Securities will be undertaken under this program. The objective of this action is to increase the availability of credit for purchases of homes.

These actions will raise reserves in the banking system and increase the size of the Fed’s balance sheet. The sum of today’s action is $800 billion. The Fed’s balance sheet as of November 25, 2008 had ballooned to 2.19 trillion from $995.57 billion as of September 17, 2008.

Home Prices Continue to Maintain Downward Trend

The Case-Shiller Price Index and the Federal Housing Finance Agency (FHFA) Price Index (previously known as the OFHEO Price Index) posted accelerating declines in September. The Case-Shiller Price Index for the 20 metro areas fell 17.4% on a year-to-year basis in September vs. a 16.6% drop in August, recording the largest drop since 2001 (see chart 3) in the short history of the index which begins in 2000. The FHFA price index declined 7.0% in September compared with a 6.1% drop in the prior month. The bottom line is that the elevated level of inventories is putting enormous pressure on home prices and weak employment conditions are also not a positive factor for home sales.

Corporate Profits and Q3 GDP Preliminary Estimate

Corporate profits with inventory valuation and capital consumption allowances decreased 0.9% in the third quarter following a 3.8% decline in the second quarter. On a year-to-year basis, corporate profits fell 9.0% vs. an 8.3% drop in the second quarter. Corporate profits have now dropped for six straight quarters on a year-to-year basis (see chart 4). The back-to-back declines in corporate profits suggest impending weakness in business spending in the quarters ahead. There was a bit of positive news — corporate profits of the non-financial sector rose 6.1% after four straight quarterly declines.

Real gross domestic product declined at an annual average rate of 0.5% in the third quarter of 2008, slightly weaker than the advance estimate of a 0.3% drop. With the exception of residential investment expenditures which were less negative after revision (-17.6% vs. -19.1%), all the major components – consumer spending, business spending, government outlays, and net exports – were weaker than estimates of the advance report. Inventories declined $29.1 billion in the third quarter compared with a reduction of $50.6 billion in the second quarter. Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the federal funds rate to 0.50% on December 16, 2008.

• Download Full Forex Commentaries

Published on  Tue, Nov 25 2008, 22:20 GMT