Author: WSJ.com: Real Time Economics

The debate over new financial rules just took a turn for the… hilarious.

A star-studded cast of past and present Saturday Night Live comedians has put together a skewering sketch pushing President Barack Obama to create an independent Consumer Financial Protection Agency, in perhaps one of the more bizarre turns in the continuing debate over how best to rewrite financial protection rules.

The video was directed by Ron Howard and features Will Ferrell as George W. Bush, Fred Armisen at Barack Obama, Darrell Hammond as Bill Clinton, Chevy Chase as Gerald Ford, Dan Aykroyd as Jimmy Carter, Dana Carvey as George H.W. Bush, and Jim Carrey as Ronald Reagan. Maya Rudolph plays Michelle Obama.

Warning, the skit isn’t exactly rated PG.

The setting for the skit is the White House’s master bedroom, and Mr. Obama and his wife are visited by presidents — alive and dead — pushing him to create a new CFPA. Banks have lobbied aggressively to kill the creation of an independent CFPA, but many unions and consumer groups have insisted that a freestanding agency is necessary to protect consumers.

Two jobs reports out today may give a better picture of the labor market than Friday’s official government numbers, which are expected to be skewed substantially by February snowstorms.

Unless these guys were getting paid to play football in the snow, their jobs won’t be counted by the government. (Reuters)

The reports paint a picture of a labor market that continues to struggle, but is inching closer to job gains. Payroll giant Automatic Data Processing Inc. and consultancy firm Macroeconomic Advisers released data showing private payrolls fell by 20,000 in February. While the economy still isn’t adding jobs in the private sector, the decline is the smallest in two years. In another positive sign, medium-sized businesses and the services sector added jobs in February. ADP also doesn’t include the government, which has been adding census workers and is providing a source of new positions.

Meanwhile, outplacement firm Challenger, Gray & Christmas reported that U.S. companies announced plans to cut 42,090 jobs in February, the lowest level since 2006. The measurement doesn’t include hirings, so lower reductions in payrolls could be offset by companies adding workers.

Both figures are less vulnerable to weather effects than the government numbers, which could show a net decrease of up to 100,000 jobs due to February blizzards.

The official Labor Department report is compiled through a survey, which asks employers to provide the number of workers receiving pay for the period that includes Feb. 12. That means that hourly employees who weren’t paid because they missed work aren’t counted in the survey.

By comparison, the ADP report counts the number of workers who are recorded on a company’s payroll roster. Even if workers aren’t paid, many companies don’t remove them from the system. Meanwhile, the Challenger figures just count up announced layoffs. Temporary staffing moves due to weather wouldn’t be included.

A roundup of economic news from around the Web.

• Stimulus Expenditures: Writing for voxeu, Joshua Aizenman and Gurnain Kaur Pasricha say that stimulus expenditures are less than you might think. ” The crisis led to significant fiscal stimulus efforts by the U.S. government to offset the downturn. But this column argues that, properly adjusted for the declining fiscal expenditure of the fifty states, the aggregate stimulus was close to zero in 2009. While a net decline was avoided, the stimulus did not raise aggregate expenditure above its predicted mean. This can explain the anaemic reaction of the U.S. economy to the alleged “big federal fiscal stimulus”.”
• Kohn: On the Baseline Scenario, James Kwak isn’t sorry to see Don Kohn leave the Fed. ” Let’s not mince words. Kohn was one of the leading cheerleaders for the Greenspan Doctrine. Here’s one example. In 2005, Raghuram Rajan gave a now-famous paper at the Fed’s Jackson Hole conference warning of the impending financial crisis. Kohn gave a response, which we describe this way in 13 Bankers: “Fed vice chair Donald Kohn responded by restating what he called the ‘Greenspan doctrine.’ Kohn argued that self-regulation is preferable to government regulation (“the actions of private parties to protect themselves . . . are generally quite effective. Government regulation risks undermining private regulation and financial stability”); financial innovation reduces risk (“As a consequence of greater diversification of risks and of sources of funds, problems in the financial sector are less likely to intensify shocks hitting the economy and financial market”); and Greenspan’s monetary policy resulted in a safer world (“To the extent that these policy strategies reduce the amplitude of fluctuations in output and prices and contain financial crises, risks are genuinely lower”). Kohn’s conclusion reflected the prevailing view of Greenspan at the time: “such policies [recommended by Rajan] would result in less accurate asset pricing, reduce public welfare on balance, and definitely be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.” Now this does not mean that Donald Kohn is a bad person; it just means that he was wrong, along with Alan Greenspan and Ben Bernanke. If recent accounts are to be believed, he, like Bernanke, was relatively quick to shift gears when the crisis exploded and figure out effective responses, for which he deserves credit. (He also oversaw the stress tests, for better or worse.) But from where I’m sitting, the fewer members of the old guard, the better.”
• Payday Lenders: Felix Salmon posts a chart showing lobbying expenditures by payday lenders have exploded. “The meat of the story, though, from Keith Epstein of the Huffington Post Investigative Fund, is well worth reading: it shows an astonishingly effective lobbying organization which has persuaded lawmakers around the country that payday lenders are both popular in their local communities and not particularly profitable. One of the biggest payday-lender lobbyists calls itself the Community Financial Services Association; it increased its spending by 74 percent over the past year, to $2.56 million. That helps pay for people like Steven Schlein, who goes around saying things like “Who’s going to make that kind of credit available to working people besides us?”. (Answer: banks, community development credit unions, non-profit lenders, etc. And if “that kind of credit” is being extended at 650% APRs, then maybe it shouldn’t be made available at all.)”

Compiled by Phil Izzo

Personal bankruptcy filings were back on the upswing in February after dipping the prior month.

There were 111,693 consumer bankruptcy filings last month, up 9% from January, the American Bankruptcy Institute said Tuesday based on data from the National Bankruptcy Research Center. The increase comes after filings fell 10% in January.

The report offered little indication that the flood of consumer bankruptcies is easing. The number of filings was 14% above year-ago levels. Compared to the same period two years ago – when the unemployment rate was just 4.8% — filings were up 47%.

Despite the economy’s modest recovery, individuals face high unemployment and tight credit. Difficulty accessing credit takes a toll on small companies in particular, which are more likely to be at least partly supported by the owner’s personal assets and credit.

Both continuing pressure on small businesses and the persistently high unemployment rate will continue to feed consumer bankruptcies. The American Bankruptcy Institute estimated that the number of filings this year could top 1.5 million.

The government’s official tally of consumer bankruptcies last year jumped to 1.4 million, a 32% increase from 2008, the Administrative Office of the U.S. Courts said Tuesday. That number – which had been previously estimated by the bankruptcy research center – was the highest since 2005 when Congress overhauled bankruptcy laws to make it more difficult for individuals to shed their debts.

Meanwhile, the number of businesses that filed for bankruptcy in 2009 climbed to 60,837, 40% higher than the previous year.

As the House and Senate debate bills that would create jobs as well as a new consumer protection agency within the Federal Reserve, states across the country are pushing their mini-me bills that they hope will accomplish some of the same ends.

On the consumer side, the Arizona Senate on Monday passed a bill that would restrict many of the risky home loans that helped the state become one of the nation’s foreclosure capitals. Among other things, the new bill would bar so-called “negative amortization” loans and forbids lenders from “approving loans where there is little prospect the borrower’s income is enough to make future payments,” according to the Arizona Daily Sun. Connecticut’s Senate is working on a plan that would require banks to have a representative that homeowners facing foreclosure can talk to about their options.

The number of state consumer protection laws pales in comparison to the slew of jobs proposals being debated in statehouses country. The National Conference of State Legislatures reported that 16 states have proposed bills to ban credit checks on most job applicants, while Hawaii and Washington already have such bans in place. The Kansas House of Representatives on Monday approved a predatory job plan that rewrites and economic incentive programs to encourage employers to move jobs to Kansas from other states.

Legislatures in North Carolina and Indiana are also debating jobs plans (though they are in various stages and may never be law).

The recession hit men harder than women. The key reasons, Federal Reserve researchers say in a study released Tuesday: Male-dominated industries took a bigger hit in the downturn, and a disproportionate share of men who reentered the labor market failed to find a job.

The jobless rate was roughly the same for men and women — around 5% — when the recession started. By August 2009, however, the gap was almost three percentage points: 11% for men and 8.3% for women. That difference was the largest in the postwar era.

Meanwhile, payroll employment declined 8.2% for men but only 3.9% for women from December 2007 to January 2010, authors Ayşegül Şahin and Joseph Song of the New York Fed and Bart Hobijn of the San Francisco Fed found. “As a consequence, for the first time on record, the number of women on U.S. payrolls closely rivals the number of men,” they write.

The authors trace the disparity to the the fact that job losses in the recession were concentrated in male-dominated, goods-producing industries such as construction and manufacturing.  Among the industries that fared better during the recession were health care and education, in which women have heavier representation than men.

In addition, during the recession many men who dropped out of the labor force early in the downturn “became less willing to sit out the weak labor market and instead renewed their search for work,” the authors write. Also, they say the depressed economy likely prompted retirees and students to begin job searches — pushing up the unemployment rate — because they had run down their liquid savings or saw a drop in their home equity or retirement funds.

The Midwestern economy is emerging from the recession, diminishing the chances of a return to recession but increasing the likelihood that inflation in the region may soon pick up, according to the February Business Conditions Index for the Mid-America region released by Creighton University.

The survey of supply managers across a nine-state region that includes Minnesota and Oklahoma rose to 61.0 in February from 54.7 in January and 50.3 in December. Like the Institute for Supply Management and J.P. Morgan surveys of purchasing managers (written about in today’s Journal), the Mid-America index is a diffusion index where readings above 50.0 indicate growth and anything below is contraction.

The report echoed many of the same trends in the ISM and J.P. Morgan surveys, but had stronger concerns about inflation. The survey’s prices-paid index, which tracks the cost of raw materials and supplies, was at 78.3 in February from 75.5 a month earlier. That was the ninth month in a row that the index was above 50.

“The prices-paid index has more than doubled over the past year. This month we asked supply managers how much they expect prices for products they purchase to change by in the next six months,” according to a statement by Creighton University Economics Professor Ernie Goss. “Almost three of ten, or 29 percent, expect prices to expand by more than five percent in the next six months. Despite deflation warnings from some economists and policymakers, only 1 percent of supply mangers expect a cut in prices in the next six months.”

Mr. Goss also said he worried that despite the region’s improving outlook he had some concerns about future growth: “I am concerned that the economic problems in Europe, which are pushing the value of the dollar higher, will negatively influence regional growth. This part of the nation depends heavily on agriculture, which likewise suffers from a ‘too strong’ dollar. However, the likelihood of the regional economy dipping back into recessionary territory has diminished significantly according to our surveys of supply managers. While I expect the overall regional economy to expand in the months ahead, I continue to expect job growth to be subdued, especially for rural areas of the nine-state region.”

Initial reaction from Democratic senators and the White House was mixed for a plan Senate Banking Committee Chairman Christopher Dodd (D., Conn.) is advancing to house a new consumer-protection division within the Federal Reserve. (Long and short of it: everyone wants more details.)

The plan is a compromise between Mr. Dodd and Sen. Bob Corker (R., Tenn.), as Democrats and Republicans have long been at odds over how best to redraw consumer rules. Not only will Mr. Dodd need some Republican support, but he’ll also need Democrats to feel comfortable with the plan as well, and many Democrats are skeptical that the Fed will place enough emphasis on consumer protection.

Notably, only one senator so far has indicated outright opposition to the idea (although not all senators have weighed in). Some quick takeaways:

1) “One way or another, we’ve got to have more consumer protection,” said Sen. Carl Levin (D., Mich.). New rules must “effectively protect consumers from the abominable behavior we saw” from banks.

2) “I want to see the details on this, because we can’t just say we’re going to allow the continuation of more of the same,” said Sen. Debbie Stabenow (D., Mich.). “The public expects us to be the check on financial institutions in the public interest.” She said she had “not decided yet what I will support.”

3) Sen. Jeff Merkley (D., Ore.) said he was “very concerned” about the proposal, citing the “number of times that monetary policy is the penthouse at the Fed, safety and soundness in the upper floors, and consumer protection has been stashed in the basement…The question I would raise is, ‘why the Fed?’” He said in the past, consumer protection at the Fed has been “woefully neglected.”

4) “I very much want it to be freestanding,” said Sen. Sherrod Brown (D., Ohio). “My biggest concern is who has rule-writing power and who has enforcement power.” He also said consumer protection is always overlooked at the Fed, adding “I don’t know if it’s in the water at the Fed or tradition that leads to that…Any conflict that might arise in the past, consumer protection has finished second, unless there’s a three-way conflict, when they’ve finished third.” He said he hadn’t decided what he would support and what he might vote against.

5) Sen. Bernie Sanders (I., Vt.) had a quick response for whether he’s support putting a new consumer protection agency within the Fed. “No.”  He went on: “We need an independent financial consumer protection agency. Wall Street has this country through their greed and recklessness into the worst recession in modern history.” He said he’d fight for an independent Consumer Financial Protection Agency “as strong as I possibly can.”

6) “If the President decides that any proposal lacks the independence that he desires, we will work to strengthen that on the floor, understanding that the House has passed a very strong consumer finance protection requirement and the president is of the strong belief that that’s what financial reform requires,” White House spokesman Robert Gibbs said.

7) Sen. Richard Shelby (R., Ala.) said he’d be worried if a new consumer-protection division housed within the Federal Reserve had too much autonomy and was too independent of the central bank’s other policy makers. It would be “like moving the Department of Agriculture to the Pentagon and housing it over there and yet it’d be autonomous. I don’t see why that accomplishes much.” But Mr. Shelby said he’d take a look at any proposal.

By now, everybody should know that the February jobs numbers will be pushed lower by the big snow storms that hit in the first half of the month. But the efforts forecasters have put into figuring out just how big the hit will be is starting to seem a little silly.

Goldman Sachs economists used the National Oceanic and Atmospheric Administration’s NOAA’s Northeast Snowfall Impact Scale to gauge how past storms have affected employment, and ran a regression. Then they cross checked their results by adding a dummy variable for snowstorms to a payroll forecasting model that includes other weather-related variables. Finally, they removed the impact of temperature changes from their model.

Got all that? Long story short, the storm will subtract 50,000 to 100,000 jobs from payrolls.

Meantime, Macroeconomic Advisers updated their regression analysis of the snow storms’ impact, dropping the effect of weather in delaying net new hires and introducing a dummy variable that allowed for a shift in coefficient for the 1996 blizzard.

Anyhow, the upshot is the forecasting firm thinks that between 150,000 and 220,000 jobs were temporarily lost in February as a result of the weather.

Now, given the large difference between the two models’ results, and given that even in normal times economists don’t do such a good job at forecasting job changes, one might think that the best thing would be to simply wait and see. February’s will include weather related job losses, March will see a rebound and, assuming no freak spring snowstorms, April will show the underlying trend.

But where’s the fun in that?

Cities will face budget deficits between $12 billion and $19 billion next year, a number that could rise by up to an additional $10 billion if state’s withhold money to cure their own woes, according to a report from the Drum Major Institute. The report notes that cities will get $2.8 billion in aid from the 2011 federal budget, hardly enough to fill the gaps and setting the stage for deeper budget cuts in the coming years.

Both cities and states have seen their revenues wilt in the aftermath of the recession, but many mayors have long complained that money form the $787 billion stimulus package — about 1/3 of which was set aside for cities and state budgets — has been absorbed at the state level. Unlike the federal government, most cities have to balance their budgets, prompting deep budget cuts have already prompted some cities to redefine what services they provide and how they pay for them.

The Drum report notes that cities combined budget deficits could reach $83 billion over the next three years, so cities are already hacking their budgets. According to the report about 2/3 of cities have instituted hiring freezes or layoffs, 62% have delayed or canceled capital projects, 11% have cut social services and 25% have increased property tax rates.

The 2011 federal budget, of course, will have plenty of aid for cities. But much if it is in investments for things like new rail lines instead of money to fill budget gaps in areas such as social services.

According to the report, President Barack Obama’s 2011 budget includes several programs targeted at cities and neighborhoods that total $2.8 billion, including:

• $687 million for the interagency Sustainable Communities Initiative that encourages planning to link housing and transportation investments;
• $266 million for Build America Bonds that subsidize borrowing for state and local governments;
• approximately $1.7 billion for programs in the Department of Housing and Urban Development and the Department of Justice designed to revitalize distressed communities and provide affordable housing; and
• approximately $200 million to support regional innovation “clusters.”

From the WSJ’s China Real Time Report blog:
China’s chief banking regulator sees little chance of high inflation world-wide, even as his country’s own policymakers are pulling back from stimulus policies to avoid a surge in domestic prices.

Growth in the developed world remains weak and the recovery is likely to be slow, which will balance any pressure on global commodity prices from China’s own rapid growth, argues Liu Mingkang, the respected U.K.-educated chairman of the China Banking Regulatory Commission. He made the comments in an interview with Seeking Truth, a Communist Party magazine. (The full text of the interview is available in Chinese here)

“The global economic recovery will be a slow, complex and winding process,” Liu said, ticking off a long list of problems: high unemployment in developed countries; an international financial system that is still decreasing leverage and disposing of bad assets, and an overhang of excess capacity.

“Given this kind of background, global liquidity while relatively flush is not likely to generate significant global inflation,” Liu said.

The extraordinarily loose monetary policy in most major economies has made it easier for investors to put money into commodity markets, Liu said, but that impact on prices is most likely transitory. “Expectations of the depreciation of the U.S. dollar and various kinds of speculation may for a period of time raise the price of certain commodities, but it is difficult to imagine that this kind of rise will become a long-term trend,” he said.
And in any case the world’s current super-loose monetary policies can’t and won’t be a permanent feature of the markets. Liu doesn’t think there will be a “substantive withdrawal” of stimulus policies in the developed world anytime soon.

“But with the gradual improvement in economic fundamentals, as well as increasing pressure on public debt, stimulus policies will sooner or later have to be withdrawn, so there will be significantly less liquidity to drive continued increases in commodity prices,” Liu said.

Wait, you say, aren’t global commodity prices these days driven by China’s demand, which is growing much faster than in rich countries? Not necessarily, Liu argues.
“The fast growth in China, India and other emerging market economies will increase demand for commodities, but in terms of absolute amounts, developed economies are still the major consumers of commodities,” Liu said.

“In a situation where developed economies are recovering slowly, there is no pressure on global commodity prices to rise.”

– Andrew Batson

The Federal Reserve needs to alter its communication strategy so it is less hamstrung by language it uses in its policy statement, says Charles Plosser, president of the Federal Reserve Bank of Philadelphia.

Philadelphia Fed President Charles Plosser (Bloomberg News)

The Fed has been saying since last year that short-term interest rates would remain exceptionally low for an “extended period,” meaning at least several more months. Mr. Plosser said in a wide-ranging interview with the Wall Street Journal that the words make it harder for the Fed to react to changes in the economy and that it should look for ways to remove that language from its regular policy statements.

“I would rather have language that is more conditional on the state of the economy, and less upon some arbitrary time frame,” he said.

Mr. Plosser also argued that the recovery is beginning to “solidify” and that the Fed shouldn’t renew a special financing program called the Supplementary Financing Program, in which the U.S. Treasury will leave up to $200 billion on deposit with the central bank, to help it manage a $2 trillion balance sheet. The program, he argued, puts the Treasury too close to the Fed’s monetary policy decisions.

Following are excerpts from the interview:

Tell me about the economy. Where do you think we are right now?

Plosser: We’re in the early stages of a recovery. It is beginning to solidify. The bits and pieces of the economy that are improving are becoming somewhat more broad-based. The surveys and different statistics, all of them are showing better signs. At the end of last year, a lot of it was inventory action in the fourth quarter, which is perfectly predictable. A lot of volatility in the business cycle is inventories. We had a tremendous drop in inventories and a lot of the magnitude in this cycle you can think of as a very massive inventory cycle. But other things have stabilized. Manufacturing has begun to stabilize. We see that in our surveys and a lot of the regional surveys. Financial markets are in much better shape than they were a year ago or even six months ago. We’re getting better and better news and that is going to continue to build. So I’m feeling pretty good that we’ve got something sustainable in place.

Even though interest rates are very low, and some markets have come back, we have markets like asset backed securities, securities ‘repo’ loans not going anywhere, commercial paper soft. One could argue that financial conditions are still very tight.

Plosser: I don’t think financial markets are perfect by any stretch of the imagination. One of the things you have to anticipate is that after this disruption, the magnitude or quantities in some market may never be what they were before. Markets are going to change. The way people do financing will change. Maybe asset backed securities never play as big a role as it did before hand, because there are still some places where buyers of those securities are going to be more cautious. They’re not going to be quite as blind about purchasing things that they don’t know anything about. The mix of lending and the types of lending and the types of securities might be different

What’s your assessment of how loose or tight financial conditions are right now?

Plosser: Clearly there is some ways to go before financial markets are functioning absolutely normally. But if you look at a lot of markets, particularly places where we were worried about liquidity, where we were worried about short-term funding for financial institutions and the markets freezing up, a lot of that has been repaired or at least is functioning better.

Extended period. Is it time to get rid of those words?

Plosser: I’ve never been a big fan of ‘extended period.’ I don’t like that language. I would rather have language that is more conditional on the state of the economy, and less upon some arbitrary time frame. At some point we’re going to have to get rid of it. We’ve had it for over a year now. Different people interpret it differently. We are certainly thinking hard about how would you extricate yourself form this language at some point. I’m not sure it’s the right language. That is why two or three statements ago we did have this language where we talked about interest rates could stay low as long as the economy was weak, unemployment was high, inflation was low and inflation expectations were contained. That’s a much better way to begin to communicate what matters.

Have those conditions materially changed?

Plosser: They changed somewhat but not dramatically. I still think to the extent there are risks to inflation it is not in the near term it is in the longer term. We need to be careful about how we interpret and what we look at in measuring [inflation] expectations. The TIPS [Treasury Inflation Protect Securities] stuff keeps drifting up. I’m not as worried about deflation particularly. We’ve had a huge shock in housing. If you look at the components in CPI, a lot of the softness in the CPI is coming from the huge decline in rents and housing prices and housing costs. We want to be careful not to necessarily just count on certain relative prices to keep inflation in line. The drifting up of TIPS is another piece of information we need to be cognizant of. So we need to be thinking about how we begin to phase ourselves out of this.

Is the FOMC engaged in a discussion about extricating itself from the language?

Plosser: We are engaged in the discussion. It is important that we as a committee think ahead. And we are engaged in discussions internally about our exit strategy. Even if we’re not ready to execute that exit strategy today or tomorrow or the next meeting or the meeting after, regardless of when we choose to put it in place, we need to have a plan about how we’re going to do that. And think hard about the sequencing of things. That’s an ongoing discussion we’ve been having for some period of time.

Are you prepared to drop the words ‘extended period’ right now.

Plosser: Personally, I think that those are troubling words to me. I certainly would entertain the notion that we modify them in some way to gradually give ourselves the option to act when we thought it was appropriate. What is troubling about the words is that it ties our hands, or people perceive that it ties our hands.

As soon as the word ‘extended’ doesn’t show up, the market takes that as the Fed will tighten in six months.

Plosser: That’s why I don’t like the language in the first place. I feel like it has gotten us in a box. We have to figure out how to get ourselves out of that box. Does it mean we could remove extended period language and do something very dramatic the next meeting? I don’t know. Who knows? It is dangerous for policy to become hamstrung by expectations that the market has that we inadvertently created that may not be the right implications. Our policy ought to be data driven. It ought to be systematic. To then tie our hands in some way that makes it harder to react to the data in certain ways I don’t think is very useful…
You could change the language from ‘extended period’ to ‘some period’ of time. Do you believe that ‘some period’ is less long than ‘extended period’ of time? Who knows what that means. I’m not really fond of this notion that ‘extended period’ means six months. That’s tying our hands in a way that seems to be inappropriate and unnecessary. Policy ought to be data dependent… why do I want to foster this notion that there is a fixed period of time for which this number is the right answer? I don’t want to do that. I don’t think that is a useful way to think about this in this environment.

On another issue, I would be a little bit uncomfortable restarting the Supplemental Financing Program [with the U.S. Treasury]. Treasury debt is going to hit the limit again next year, so the Treasury might be in a position where it might need to draw it down right as you are withdrawing reserves from the financial system.

Plosser: I’d just as soon get rid of that tool. I don’t think we ought to be relying on the Treasury in that way. It gives them too much discretion over our monetary policy and our balance sheet. I’d just as soon not have it. But it hasn’t been high on anybody’s agenda.

It’s only $200 billion dollars.

Plosser: It’s a rounding error. [Laughing]

What are you most worried about right now?

Plosser: There are two things that worry me. In terms of the economy, I’ve been worried about commercial real estate and its effect on small and medium sized financial institutions, although as time goes on I’m getting less and less concerned about that. As the economy gradually strengthens valuations on some of those commercial real estate properties will begin to stabilize and when that happens the banks that are exposed to that will stabilize those values. I’m less worried than I was three or four months ago.
The other worry is financial reform and Fed independence. A lot of the sound bites and commentary seem to me to be a little misplaced. I’m worried about how that is going to shake out. The most important thing as far as I’m concerned is our independence to do monetary policy. If we politicize that process, it puts [the economy] in the wrong direction.

Is the Board doing a good job defending the position of the reserve banks as the appropriate supervisors of state chartered banks?

Plosser: Ben [Bernanke] gave a pretty strong defense of it in his testimony the other day. One of the things that I think gets lost in this is that the people who want to take state member banks away from us are the same people who say the Fed was too close to Wall Street and Washington. By taking the state-member banks away from us, that will go in exactly the wrong direction. [He notes that if the Fed only regulates large financial banks, that would make it more Wall Street centric, not less.]
Rearranging the deck chairs is not going to fix any of this. We have to do supervision and regulation somewhat differently. The focus ought to be on the nature of what it is we do. Just assigning it to somebody else isn’t going to fix it.

As Greece’s budgetary woes are played out on the front pages on a day-to-day basis, other highly indebted European countries face a continuing challenge: how to prove to investors that they are different.

With a budget deficit that hit 9.3% of gross domestic product in 2009, Portugal knows that only too well.

But the head of its debt agency is determined to make investors maintain their confidence in Portugal by making them aware of the facts.

In a written response to a question from Dow Jones Newswires, Alberto Soares said the Portuguese authorities were doing their utmost to provide as much information as possible about the country’s macroeconomic and fiscal conditions, and its plans for budgetary consolidation.

Portugal’s government in January presented a plan that would lower its deficit to 8.3% of GDP in 2010, mainly through cost-control measures such as a public-sector wage freeze and a reduction of public-sector payrolls.

The European Commission has given Portugal until 2013 to bring its deficit below the 3%-of-GDP threshold required by European Union rules.

In recent months, rating agencies have warned of possible downgrades to Portugal’s ratings, citing rapid deterioration of public accounts and historically low economic growth.

Soares told Dow Jones last week that government bond issuance is likely to be “in the range of 20 billion euros” in 2010 — higher than its previous estimate of 18 billion euros, and above gross bond issuance of 16 billion euros in 2009.

“All efforts are being deployed to provide as much information as possible about Portuguese macroeconomic and fiscal perspectives and the plans for budget consolidation,” said Soares, who is Chief Executive of the Portuguese Treasury and Government Debt Agency.

“There is not a credibility question regarding data produced by Portugal, whose viability is ensured by the sound institutional framework in place.”

Portugal — along with Ireland, Italy and Spain — has been bunched together with Greece by investors, pushing up the cost of funding their sovereign debt significantly.

Greece has been under intense pressure from the EU and investors since it revealed in mid-October that its 2009 budget deficit was forecast to reach 12.7% of gross domestic product — four times EU limits.

Since then, the cost of insuring Portuguese sovereign debt against default has tripled. Portugal’s five-year credit-default swap spreads–a key measure of credit risk–are now at 158 basis points, down from a peak of 245 but still a staggering 105 basis points wider than where they stood at the start of October, according to data provider Markit. That means that the annual cost of insuring 10 million euros of Portuguese government debt against default for five years has risen by 105,000 euros to 158,000 euros.

“We believe that providing information to investors and analysts will allow the market to base views on their own analysis and differentiate the specific situation of each country, and evaluate where Portugal stands as a credit on its own merits decoupling the Portuguese situation from other countries,” Soares said.

Sen. Richard Shelby (R., Ala.) has offered two alternatives for new consumer-protection powers within the government. These contrast with a plan floated late last week by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) to create a Bureau of Financial Protection within Treasury to write rules and police consumer protection at banks.

Here are Mr. Shelby’s ideas:

1) Create a Consumer Protection Division within the Federal Deposit Insurance Corp.

a. The head of this division would be appointed by the President, and the board would include FDIC Chairman, the Comptroller of the Currency, and two independent members.
b. It would be funded by earnings on the deposit insurance fund or possibly based on fees.
c. The division would be in charge of writing all the rules for consumer protection and would report to the FDIC chairman. The FDIC board would have to approve any rules proposed by the division.

or

2) Create a Financial Products Consumer Protection Council

a. The head of this council would be appointed by the President, and other members would be the head of the prudential bank regulator and the chairman of the FDIC.
b. Funding would be based on fees.
c. The council would be directed to write all rules for consumer protection. It would be the central repository for all consumer complaints and be able to make recommendations for specific actions against banks. The FDIC would examine some large state chartered mortgage issuers.

The details of Institute for Supply Management’s manufacturing report offered an early look at how February’s snow storms affected the economy.

The overall decline in the ISM’s headline index was driven by a drop in the ISM’s production index, which fell to 58.4 from 66.2. (That means production grew, but at a slower rate.) Meantime, the supplier delivery index showed that deliveries to manufacturers were slower, and the backlog of orders index showed that more manufacturers had unfilled orders piling up.

Put it all together, and you can tell a story of heavy snow snarling shipments to and from manufacturers, slowing down production growth.

The Federal Reserve announced the retirement of Vice Chairman Donald Kohn today. In April 2009, the Wall Street Journal’s Jon Hilsenrath profiled Mr. Kohn and outlined his immense influence on central bank policy for more than 40 years. Some highlights from the article:

Over nearly four decades rising through the ranks of the Federal Reserve, Donald Kohn helped build a tradition-bound institution that embraced change slowly. Now the Fed’s vice chairman, Mr. Kohn has spent the past 18 months helping to remake the central bank on the fly as Chairman Ben Bernanke’s loyal No. 2 and primary troubleshooter.

Federal Reserve Vice Chairman Don Kohn (Bloomberg News)

The 67-year-old Kohn has sometimes been hesitant to change. But as financial markets slid in 2008 and pressure for more openness at the Fed built this year, Mr. Kohn moved on positions he and other traditionalists once viewed as sacrosanct — from whether the Fed should lend to financial institutions other than banks to the dangers of disclosing information about firms that come to it for money. He is rethinking other issues, including whether the Fed can do more to prevent bubbles and whether it should set explicit targets for inflation.

“We’re in a new world,” Mr. Kohn said in an interview. “We need to explain ourselves differently.” He says the mission now is to provide more information about its activities without giving away so much that it undermines its mission to be a lender of last resort.

Mr. Kohn has been at Mr. Bernanke’s side for nearly every critical decision during the crisis. He also has been asked to solve some of Mr. Bernanke’s biggest challenges — from finding a way to melt frozen commercial-paper markets to keeping peace among occasionally warring factions inside the Fed.

“Don is the most important nonchairman member of the board in the history of the Fed,” says Laurence Meyer, a former Fed governor.

Mr. Kohn joined the staff of the Federal Reserve Bank of Kansas City fresh out of graduate school at the University of Michigan in 1970, when Mr. Bernanke was still in high school. When Mr. Kohn moved to the Fed’s headquarters in Washington in the summer of 1975, under Arthur Burns, one of his first assignments was tracking the financial collapse of New York City. He rose to a senior position under Chairman Paul Volcker.

About the time that Alan Greenspan became chairman in 1987, Mr. Kohn became director of the Fed’s division of monetary affairs, the Fed staffer who coordinates deliberations on interest-rate moves.

“Don was my first mentor at the Fed,” Mr. Greenspan says. Mr. Kohn told Mr. Greenspan how to run his first Federal Open Market Committee meeting, the forum at which the Fed sets interest rates. He became one of Mr. Greenspan’s closest advisers and defender of Mr. Greenspan’s policies. He was named by President George W. Bush to the seven-member Fed board of governors in 2002 and became vice chairman in 2006.

Mr. Kohn is in some ways the quintessential faceless Washington bureaucrat. When he lived closer to the Fed’s office near the Potomac River, he used to ride to work on a bicycle with the pants of his gray suit tucked into his black socks.

Today he has a weekend house in the waterside town of Annapolis, Md. During the week he lives with his wife in an apartment in his son’s basement in a Washington suburb.

He is known among central bankers around the world for long hikes he leads at an annual meeting in Jackson Hole, Wyo., that some call the Don Kohn “Death March.”

Over the years, Fed officials several times considered granting emergency loans to firms other than banks — when farmers sought aid in the 1980s, when investment bank Drexel Burnham Lambert collapsed in 1990, when airlines were in trouble after the 2001 terror attacks. In each case it said no.

Traditionally, the Fed has lent only to commercial banks and only for very short durations. “Every talking point of the last 30 years about the dangers of exposing the Federal Reserve to credit risk or lending to nonbanking institutions has [Mr. Kohn’s] fingerprints on it,” says Vincent Reinhart, who succeeded Mr. Kohn as the Fed’s top monetary staffer and has since left the Fed.

In early March 2008, Mr. Kohn told lawmakers he would be “very cautious” about expanding Fed lending beyond banks. He worried about facing new counterparties and about how to regulate firms that suddenly had access to Fed loans.

Then the market’s downward spiral and mounting troubles at Bear Stearns jarred him. At a weekend meeting in Switzerland, he conferred with other central bankers who were worried about the fragility of the global financial system.

“We have to be prepared to think the unthinkable,” Mr. Kohn said to other Fed board members in a late-night video conference call on March 10.

Officials agreed to create a facility allowing investment banks for the first time to swap illiquid holdings for Treasury bonds. To take the action, officials had to agree to use powers not used since the Great Depression. A few days later, it would expand lending to investment banks further and broker the sale of Bear to J.P. Morgan Chase & Co. by taking $29 billion of Bear assets as collateral for a loan to J.P. Morgan.

He says the decision “made my stomach hurt.” Not only were markets melting down in ways he didn’t anticipate, “we were reacting in ways that we hadn’t reacted before. This would have consequences.”

Read the whole article here.

Note: This column, which originally ran as the Ahead of the Tape, has been updated and edited to include the actual figures.

A sharply higher U.S. household-savings rate was expected to be one of the lasting effects of the Great Recession, given the collapses in real estate and the stock market. But the adjustment has so far been tamer than expected.

The personal-savings rate measures the percentage of after-tax household income that is unspent in a given period. It reached 5.4% in last year’s second quarter, up from a low of 1.2% during the boom, according to the Commerce Department.

On Monday, Commerce announced that the saving rate fell to 3.3% in January, from 4.2% in December. It was the lowest rate since October 2008.

The reasons for the stall are twofold: For one, rebounding wealth since the recession’s depths has helped provide some support for consumer spending. Secondly, weak income growth has left other consumers with little choice but to spend proportionally more of their incomes, particularly in light of still-tight credit conditions.

As a result, economists have started to rethink their original estimates of household-saving behavior. Harm Bandholz, an economist at UniCredit Research, says the stock market’s recovery and signs of stability in home prices have kept the rate from rising to the 6% level he anticipated.

John Ryding, chief economist at RDQ Economics, points out that household net worth grew by $5 trillion between the first and third quarters of 2009, the latest data available, after a sharp decline earlier in the recession. Additional spending generated by the rebound helped keep the savings rate from climbing to 7% or 8%, he says.

Household savings help foster long-term economic vitality, but a swift upward adjustment makes consumer-spending growth much more difficult to achieve in the near term, a phenomenon known as the “paradox of thrift.”

If the savings rate continues its holding pattern or rises gradually, it would remove one of the headwinds to consumer-spending growth in the coming months. That would be a bullish sign for the economy in the U.S., because consumer spending accounts for roughly 70% of gross domestic product.

But with credit still tight and household net worth below boom-era levels, a genuine consumer-led recovery has to be fueled by income growth, which has barely budged in the past two years. “We need jobs,” Mr. Ryding says.

David Wessel writes:

Understanding what caused the recent financial crisis is essential to successfully refining the practice of finance to reduce the odds of repeating it. So the Financial Crisis Inquiry Commission on Friday and Saturday heard several academic economists’ take on what led to a near meltdown of the global economy.

“We are now very slowly emerging from the worst financial and housing crisis since the Great Depression,” Christopher Mayer of the Columbia Business School told the commission. The panel, he said, “stands in a unique place to examine the causes of this crisis so we can understand how to prevent this from happening in the future….It is important for us to take a critical look at what went wrong and strive not to repeat it.”

Here are some highlights of the professors’ prepared testimony, as posted on the commission’s Web site.

Randall Kroszner, University of Chicago Booth School of Business and a former Fed governor:

On reducing moral hazard: “Given the extent of interventions world-wide, issues of moral hazard will remain. The Rubicon cannot be uncrossed and financial market behavior will surely anticipate the return of the “temporary” programs and guarantees in the event of another crisis. To maintain the stability of the system and to protect taxpayers, the “too interconnected to fail” problem needs to be addressed in two ways: through improvements in the supervision and regulation framework as well as improvements in the legal and market infrastructure to make markets more robust globally.”

“Ultimately, to mitigate the potential for moral hazard, policy makers must feel that the markets are sufficiently robust that institutions can be allowed to fail with extremely low likelihood of dire consequences for the system.”

On the Volcker Rule: “Some have argued that a return to the separation of commercial and investment banking embodied in the Glass-Steagall Act would insulate banks from financial market shocks and help to promote stability6. The experience of the last few years, however, does not provide strong support for such an argument. In addition, re-introducing a Glass-Steagall separation (or Glass-Steagall “lite” such as the Volker rule) or limiting the size of institutions7 would likely result in greater fragmentation of the financial system, with the likely consequence of increasing rather than decreasing interconnectedness of banking institutions funding sources to other financial institutions and markets.

Kroszner offers a useful one-page chart summarizing all the Fed’s unusual lending with date announced, date first used, authorized and actual maximum lending and objectives (lengthen maturity, broaden collateral, expand counterparties). Read full remarks.

Pierre-Olivier Gourinchas, University of California at Berkeley:

How did subprime bust trigger a financial tsunami? “Three factors ensured that the collapse in what was a minor segment of the U.S. financial markets turned into a global financial conflagration. First, profound structural changes in the banking system, with the emergence of the ‘originate-and-distribute’ model, coupled with an increased securitization of credit instruments, led to a decline in lending standards and a general inability to re-price complex financial products when liquidity dried-up. This lowered dramatically confidence between financial intermediaries, severely disrupting interbank markets and the flow of credit. Second, banks relied increasingly on short-term financing –either directly or through off-balance-sheet vehicles— exposing themselves to significant funding risk. Lastly, increased financial globalization and the strong appetite of foreign –especially European– financial institutions for U.S. structured credit instruments quickly propagated the crisis to Europe and the rest of the World.”

Was Fed monetary policy a cause? Neither “U.S. monetary policy in the years leading to the crisis” or “the growing external deficits of the United States, the so called ‘Global Imbalances’” explains the crisis. “The fundamental disequilibrium at the root of the crisis, both in the U.S. and the global economy lies elsewhere: in the imbalance between the global demand for safe and liquid debt instruments –both within and outside the U.S.—and the limited supply of this asset.” Read full remarks.

John Geanakoplos, Yale University

On the importance of leverage: “The present crisis is the bottom of a recurring problem that I call the leverage cycle, in which leverage gradually rises too high then suddenly falls much too low. The government must manage the leverage cycle in normal times by monitoring and regulating leverage to keep it from getting too high. In the crisis stage the government must stem the scary bad news that brought on the crisis, which often will entail coordinated write downs of principal; it must restore sane leverage by going around the banks and lending at lower collateral rates (not lower interest rates), and when necessary it must inject optimistic capital into firms and markets than cannot be allowed to fail. Economists and the Fed have for too long focused on interest rates and ignored collateral. Read full remarks.

Annamaria Lusardi, Dartmouth College

On financial literarcy: “Levels of financial knowledge are strikingly low and, moreover, there is a sharp disconnect between how much people think they know and what they actually know. “ Read full remarks.

Christopher Mayer, Columbia Business School

On the housing bubble: “For the housing market, the picture is much more complex than it might first appear. The housing bubble was global in nature and also included commercial real estate, so simple explanations that rely solely on predominantly American institutions like subprime lending or highly structured securitizations cannot be the only factor leading to real estate market excesses. …My own research shows the important role played by declining long‐term, real interest rates in helping drive real estate prices to high levels, at least up to 2005. However, at some point, speculation by both borrowers and lenders took over, leading to excessive appreciation in many parts of the United States and the rest of the world.”

On securitization: “Securitization itself created incentives that led servicers to foreclose too quickly in the face of a payment default. First, theory suggests that agents (mortgage servicers) acting with perverse incentives and without proper monitoring may not act in the best interests of the principal (investors). Second, although not all authors agree, I believe there is compelling empirical evidence showing that third party servicers have undertaken more foreclosures than would otherwise have taken place if all mortgages had been made by portfolio lenders. “ Read full remarks.

Dwight Jaffee, Haas School of Business, University of California at Berkeley

On the government’s role in creating the housing bubble: “I find the GSEs [government sponsored enterprises including Freddie Mac and Fannie Mae] to have been a significant factor in expanding the mortgage crisis as a result of their high volume of high-risk mortgage purchases and guarantees. Furthermore, I find that the GSE housing goals for lending to lower-income households and in lower-income regions were secondary to profits as a factor motivating the GSE investments in high-risk mortgages.

‘I find that the FHA [Federal Housing Administration] played a minor, and basically irrelevant, role in creating or expanding the mortgage crisis, as evidenced by its rapidly falling share of total mortgage lending during the housing bubble.

“I find no evidence that CRA [Community Reinvestment Act] incentives played a significant or unique role in expanding highrisk lending during the housing bubble. The CRA is open, however, to claims of “guilt by association”, and thus I endorse any further empirical tests that could determine more precisely any role the CRA may have played in creating or extending the recent rounds of high-risk and undesirable mortgage lending.” Read full remarks.

Markus Brunnermeier, Princeton University

On why things got so bad: “Four economic mechanisms through which the mortgage crisis amplified into a severe financial crisis: 1) Borrowers’ balance sheet effects cause two “liquidity spirals.” When asset prices drop financial institutions’ capital erodes and, at the same time, lending standards and margins tighten. Both effects cause fire-sales, pushing down prices and tightening funding even further. 2) The Lending channel can dry up when banks become concerned about their future access to capital markets and start hoarding funds (even if the creditworthiness of borrowers does not change). 3) Runs on financial institutions, like those that occurred at Bear Stearns, Lehman Brothers, and Washington Mutual, can cause a sudden erosion of bank capital. 4) Network effects can arise when financial institutions are lenders and borrowers at the same time. In particular, a gridlock can occur in which multiple trading parties fail to cancel out offsetting positions because of concerns about counterparty credit risk. To protect themselves against the risks that are not netted out, each party has to hold additional funds.” Read full remarks.

(For more on Brunnermeier, see Justin Lahart’s May 2008 story on Bernanke’s Bubble Laboratory.)

Anil K Kashyap, University of Chicago Booth School of Business.

On why the banks were so vulnerable: “The proximate cause of the credit crisis (as distinct from the housing crisis) was the interplay between two choices made by banks. First, substantial amounts of mortgage-backed securities with exposure to subprime risk were kept on bank balance sheets even though the “originate and distribute” model of securitization that many banks ostensibly followed was supposed to transfer risk to those institutions better able to bear it, such as unleveraged pension funds. Second, across the board, banks financed these and other risky assets with short-term market borrowing. This combination proved problematic for the system. As the housing market deteriorated, the perceived risk of mortgage-backed securities increased, and it became difficult to roll over short-term loans against these securities. Banks were thus forced to sell the assets they could no longer finance, and the value of these assets plummeted, perhaps even below their fundamental values—i.e., funding problems led to fire sales and depressed prices. And as valuation losses eroded bank capital, banks found it even harder to obtain the necessary short term financing—i.e., fire sales created further funding problems, a feedback loop that spawned a downward spiral. Bank funding difficulties spilled over to bank borrowers, as banks cut back on loans to conserve liquidity, thereby slowing the whole economy.” Read full remarks.

Real Time Economics previously previewed a presentation by Gary Gorton of Yale University’s School of Management. Read it here.

Warren Buffett, in his annual letter to shareholders, steers clear of discussing prospects for the overall economy. But he touches on real estate and housing finance as they affect Berkshire Hathaway’s Clayton Homes, which makes modular housing units.

Mr. Buffett cites two reasons for the industry being “in shambles.” (Industry output of manufactured homes has fallen from 382,000 units in 1999 to 60,000 units in 2009.)

1) Historically low housing starts (554,000 units in 2009), which “must be lived with if the U.S. economy is to recover.”

“Paradoxically, this is good news,” he writes. “People thought it was good news a few years back when housing starts –- the supply side of the picture -– were running about two million annually. But household formations –- the demand side –- only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.”

“There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers’ program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations. Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below ‘bubble’ levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

2) Manufactured housing is suffering from a “punitive differential” in mortgage rates between factory-built homes and site-built homes, Mr. Buffett writes. He acknowledges that “Berkshire has a dog in this fight,” but he says the rate differential causes problems for many lower-income Americans, in addition to Clayton.

“The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 5.25%. In addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an action that also helped to keep rates at bargain-basement levels.”

“In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a meritorious buyer of a factory-built home must pay about 9% on his loan. For the all-cash buyer, Clayton’s homes offer terrific value. If the buyer needs mortgage financing, however –- and, of course, most buyers do –- the difference in financing costs too often negates the attractive price of a factory-built home.”

“Last year I told you why our buyers – generally people with low incomes – performed so well as credit risks. Their attitude was all-important: They signed up to live in the home, not resell or refinance it. Consequently, our buyers usually took out loans with payments geared to their verified incomes (we weren’t making ‘liar’s loans’) and looked forward to the day they could burn their mortgage. If they lost their jobs, had health problems or got divorced, we could of course expect defaults. But they seldom walked away simply because house values had fallen. Even today, though job-loss troubles have grown, Clayton’s delinquencies and defaults remain reasonable and will not cause us significant problems.”

“We have tried to qualify more of our customers’ loans for treatment similar to those available on the site-built product. So far we have had only token success. Many families with modest incomes but responsible habits have therefore had to forego home ownership simply because the financing differential attached to the factory-built product makes monthly payments too expensive. If qualifications aren’t broadened, so as to open low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems destined to struggle and dwindle.”

Could worries about small business be overblown?

Among the many worries of Federal Reserve officials, a big one is the extent to which tight bank credit will prevent hiring by small businesses, which tend to account for a disproportionate share of job growth in recoveries. Big companies, the logic goes, can borrow from bond markets, but smaller ones have nowhere to go if the bank says no.

J.P. Morgan economists Bruce Kasman and Robert Mellman, though, believe the Fed’s concerns might be misdirected. They point to new Labor Department data, released this week, that show that while small businesses haven’t started adding jobs, they did manage to cut losses by more than half in the second quarter of 2009. Meanwhile, job losses at large firms actually accelerated, at a time when those firms were borrowing unprecedented amounts of money through bond markets.

Messrs. Kasman and Mellman also note that in a study published this week by the National Federation of Independent Business, small business owners cited poor sales as their main problem. The business owners also said that getting a loan has become a lot harder, but only about one in ten cited that as their most important problem right now.

To be sure, none of this means reluctant lenders won’t become a problem if and when small businesses as a whole do gain the confidence to start adding jobs. Overall bank lending in the US economy shrank 7.4% in 2009 — the sharpest drop since 1942. And the local and regional banks that typically lend to small businesses face some big obstacles to turning that trend around, not least of which is the more than $250 billion analysts at Deutsche Bank estimate banks still stand to lose on souring commercial-real-estate loans.

In short, it’s much too early for the Fed to relax.