TREASURIES-Sit tight in Asia ahead of Fed, supply

Reuters -

Nov-04-2009

TREASURIES-Sit tight in Asia ahead of Fed, supply

(topic overview)
CONTENTS:

NEW YORK (Reuters) - The U.S. economy may have turned a corner after the deepest recession in some 70 years, but Federal Reserve policymakers appear to be in no rush to raise interest rates. (More...)
Trick or treat has passed for kids, but it begins today for grown-ups. (More...)
With nearly 10 percent of the labor force out of work, consumer spending -- the main driver of the U.S. economy and key to a sustainable recovery -- remains challenged. (More...)
Joshua Zumbrun, 11.04.09, 06:00 AM EST The economy is improving, but probably not enough for central bank policy to start changing. (More...)
The review process is expected to include staff from the Fed's board, from the reserve banks that supervise the big banks and from other financial regulators, Tarullo said. (More...)
A rate increase isn't in the cards anytime soon, yet the debate is already under way over whether the Fed should raise its target rate off the historic low of 0%-0.25% in small or large steps. (More...)
The government reports October labor data Friday, with most analysts expecting the jobless rate to rise to 9.9 percent. (More...)
Benchmark 10-year notes were steady in price from late U.S. trade on Tuesday to yield 3.473 percent US10YT=RR. Ten-year Treasuries note futures inched up 1/32 to 118-6/32 TYv1. (More...)
The Eurodollar market that offsets the impact of interest rate shifts on foreign exchange is priced for a 4% target rate by December 2013a very conservative guess. (More...)
Even if rate hikes were in the offing, Brian Belski, chief investment strategist for Oppenheimer recently argued in a research note that rate hikes actually could be a rosy sign for investors. (More...)
With U.S. bank standards remaining quite restrictive at or near all time highs, i.e. hard to receive a load -' money is not changing hands as fast as most believe. (More...)

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NEW YORK (Reuters) - The U.S. economy may have turned a corner after the deepest recession in some 70 years, but Federal Reserve policymakers appear to be in no rush to raise interest rates. The Fed is widely expected to keep its benchmark interest rate where it has been since December -- near zero -- when it meets this week. With underlying inflation pressures actually decreasing and most Fed officials expecting the recovery to be slow, there is little incentive for the Fed to change its easy money policy. [1] NEW YORK, Nov 2 (Reuters) - Nearby U.S. short-term interest rates futures were unchanged to higher on Monday, suggesting traders anticipate the Federal Reserve will leave its near-zero rate policy alone well into 2010. This view of a protracted easy Fed policy has come even as data show the U.S. economy is emerging from the worst downturn in 70 years.[2]

The latest "Fed fake" is a newswire story about Michael Woodford, a member of the Monetary Policy Advisory Panel for the Federal Reserve Bank of New York. Asked if the Fed will soon drop its promise to keep rates low for an "extended period," he responded: "I could imagine them dropping the language." He went on to explain that "the problem with this kind of language is that it's perceived as making a promise about future interest rates independently of what happens in the meantime."[3]

WASHINGTON (Reuters) - Federal Reserve officials meeting this week must weigh improving economic data against the risk, reinforced by a persistently weak job market, that a burgeoning recovery remains on shaky ground. A 3.5 percent annualized jump in third quarter gross domestic product revived debate between analysts who believe a sustainable turnaround is under way, and those who think growth will falter once a heavy dose of stimulus fades. The uncertainty is evident within the Fed itself, with many policymakers emphasizing the hazards in their outlook, even as they vow to vigorously fight any early signs of inflation. With inflationary warning signals largely absent, an immediate shift in the central bank's ultra-easy policy stance, including any tinkering with its pledge to keep interest rates low for an "extended period," appears unlikely. "The Federal Reserve is unlikely to change its assessment significantly," said Marc Chandler, global currency strategist at Brown Brothers Harriman.[4] A Fed staff projection used by policymakers at the September 22-23 FOMC meeting showed unemployment holding as high as 9.25 percent by the end of 2010 and then falling to about 8.0 percent by the end of 2011. Moody's Brusuelas predicted the FOMC statement would conclude that conditions will likely "warrant exceptionally low levels of the federal funds rate for an extended period," a phrase he noted had been in every statement since March. "But the Fed may be ready to tweak it soon, which would be significant," he said. "We will be watching to see if the Fed adjusts its commitment to keeping rates low for an 'extended period,' which may signal the central bank will remove some monetary stimulus earlier than anticipated." Such a minor change to the Fed policy outlook could provide support to the depreciating dollar, while appeasing inflation hawks, he said. Some central banks have begun raising interest rates, such as Australia and Norway in October, putting additional pressure on the dollar. "So far, I am reluctant to assume that the Fed will raise policy rates in response to this pressure.[5]

WASHINGTON — Even with the Federal Reserve widely expected to leave interest rates at a record low this week to nurture the fragile recovery, fissures are growing among policymakers about when to start boosting rates to head off inflation. A shift to higher borrowing costs is probably months away, but Fed Chairman Ben Bernanke and his colleagues likely will privately debate how best to signal a change in stance to investors, businesses and ordinary Americans when they open a two-day meeting Tuesday. At its last meeting in late September, the Fed opted to stretch out into early next year a key program aimed at forcing down mortgage rates. It isn't expected to veer from that course this week.[6] WASHINGTON — The U.S. Federal Reserve opened a two-day policy-setting meeting Tuesday expected to leave interest rates near zero and emergency measures on hold to underpin fragile recovery from recession. The Federal Open Market Committee (FOMC) headed by Fed chairman Ben Bernanke likely will stay its highly accommodative course to help get credit, the lifeblood of the economy, flowing as the recovery progresses in fits and starts, analysts said. "We don't expect any change in the underlying federal funds interest rate target, currently zero percent to 0.25 percent, or a change in the timing of the Fed?s removal of its quantitative easing program," said Frederic Dickson at DA Davidson & Co. The FOMC is expected to announce its rate decision around 2:15 pm (1915 GMT) Wednesday.[7] WASHINGTON — The U.S. Federal Reserve is unlikely to raise key interest rates this week or unwind emergency support as the economy starts a tough recovery from recession, analysts say. Fed policymakers were expected to hold the base lending rate at near-zero and maintain a trillion-plus dollar program to underpin the recovery at the conclusion of their two-day meeting Wednesday.[5]

ON HALLOWEEN, some kids dressed as Ben Bernanke, the chairman of the Federal Reserve, and asked for euros or gold instead of candy. This was pretty funny stuff for grown-ups worried about a weak dollar and the effects of the Fed lowering interest rates to almost nothing to help the U.S. economy stabilize from the credit crisis.[8] The Federal Reserve is required by statute to focus on employment levels and price levels. That the economy is technically growing is good news, but most observers believe the Fed will at least wait for unemployment to start coming down before raising interest rates.[9]

At the sessions, Fed regulators told leaders of 28 of the largest financial firms that the central bank was serious about enforcing the executive pay guidelines it proposed late last month. At the Fed's request, the bank executives were accompanied by members of their boards' compensation committees. At one of the meetings, in New York, William C. Dudley, president of the Federal Reserve Bank of New York, told Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein, JPMorgan Chase & Co. Chief Executive Jamie Dimon, Morgan Stanley Chief Executive John Mack and others that he wanted the banks to begin incorporating the new practices as they set year-end bonuses in the coming months -- even though the rules have not yet been finalized. Regulators stressed that the Fed was not looking to cap overall pay but instead wanted the banks to structure bonuses in ways that do not encourage excessive risk taking, according to more than half a dozen people who attended the meetings or were briefed on them. Fed officials urged the banks to do more to align pay with long-term performance, such as by awarding a significant portion of pay in stock, these people said. Dudley told the executives that he expected the guidelines to be formalized by year's end. After the New York session, executives at three of the banks said that nothing they had heard raised alarms.[10] WASHINGTON -- Federal Reserve officials told top bankers Monday they should start overhauling their employees' pay packages as soon as possible, even before the Fed finalizes its proposed compensation rules. During meetings and conference calls across the U.S., Fed officials told executives from top financial institutions they needed to immediately determine whether their compensation structures were consistent with an October proposal from the central bank aimed at curbing some bonuses. Fed officials told the bankers, who represent the country's 28 top foreign and domestic firms, that the companies must turn over by Feb. 1 a list of the changes they planned to make to align their pay structures with the Fed's plan. The Fed is urging banks to consider the proposal as they weigh 2009 bonuses.[11] WASHINGTON/NEW YORK, Nov 2 (Reuters) - The U.S. Federal Reserve summoned chief executives from the United States' biggest banks on Monday to prod them toward reining in pay practices blamed for sparking the financial crisis. In meetings across the country with the 28 largest U.S. banks, Fed officials laid out their expectations for bank-led changes to tailor compensation more closely to risk taking.[12]

NEW YORK, Nov 2 (Reuters) - The Federal Reserve Bank of New York huddled with leaders of about 20 major banks on Monday to discuss proposed rules designed to tie pay to performance and curb excessive risk-taking, sources familiar with the meeting said. The Fed told the bank executives it is serious about its executive compensation rules and wants banks to begin incorporating them in year-end compensation plans, the sources said. William Dudley, the head of the New York Fed, participated in the meeting, telling the executives they must figure out how to compensate risk-takers while being disciplined on compensation, a source said. The Fed also asked for feedback on its proposed rules. Bank CEOs, who were on hand for the half-hour meeting with members of their compensation committees, also had opportunities to ask questions or offer comments.[13] NEW YORK, Nov 2 (Reuters) - Morgan Stanley ( MS.N ) chief executive John Mack stressed during a meeting with the New York Federal Reserve the need for global coordination among regulators as it relates to executive pay, sources familiar with the matter said. About 20 banks participated in the half-hour meeting at the New York Fed where they were briefed on recently proposed pay rules.[14]

The answer in our view is almost certainly "no." It is important to understand how the Bernanke Fed signals major policy changes. The signals don't come from Reserve Bank presidents or advisers; they come from either the overall committee--in the form of the official statements--or from the core of the committee--that means Bernanke, Kohn, and to a lesser extent New York Fed President Dudley. The Advisory Panel plays a very secondary role in thinking at the Fed. When I was at the Federal Reserve Bank of New York, we had to brief the advisory group before they talked so they were up to speed on the data.[3]

NEW YORK, Nov 2 (Reuters) - U.S. Treasuries expanded early losses on Monday when stronger-than-expected data on manufacturing, construction and home sales pushed stocks higher and dented demand for safe-haven U.S. government debt. The market reaction to the stronger-than-expected economic data was short-lived, however, because investors are looking ahead to other key data due this week and to what the Federal Reserve will say on Wednesday at the conclusion of the Federal Open Market Committee's two-day monetary policy meeting.[15] NEW YORK, Nov 2 (Reuters) - U.S. Treasuries fell on Monday after stronger-than-expected data on manufacturing, construction and home sales spurred hopes of a solid economic recovery and dented demand for safe-haven U.S. debt. Losses were limited however, with many investors unwilling to take a strong position as they wait for the Federal Reserve to speak on Wednesday after its two-day monetary policy meeting and look ahead to Friday's October non-farm payrolls report.[16]

NEW YORK, Nov 3 (Reuters) - U.S. Treasuries prices rose on Tuesday, driven by weaker equity markets and investors' variable appetite for risk ahead of this week's Federal Reserve monetary policy meeting. Strategists said range-bound trade with little conviction would characterize activity before Wednesday's statement from the Federal Reserve at the conclusion of its two-day Federal Open Market Committee (FOMC) meeting.[17] NEW YORK, Nov 3 (Reuters) - U.S. government securities prices slid on Tuesday as traders prepared for Wednesday's Treasury refunding announcement and for a statement from the Federal Reserve on monetary policy. Dealers must make room for new supply that will arrive next week, but the Treasury will announce the size and terms of those three refunding auctions on Wednesday, after which the securities can be bought and sold on a "when-issued" basis. Investors often move to cheapen Treasuries prices ahead of such auctions, and many are worried that the appetite for the large doses of new U.S. government debt could eventually wane.[18] NEW YORK, Nov 3 (Reuters) - Prices of some U.S. Treasuries erased narrow gains and turned lower on Tuesday as traders positioned themselves for Wednesday's Treasury refunding announcement and a statement from the Federal Reserve on monetary policy.[19]

NEW YORK (CNNMoney.com) -- Bond prices were mixed on Tuesday afternoon as investors await a statement from the Federal Reserve on monetary policy due Wednesday and monthly jobs data due Friday.[20] NEW YORK (Dow Jones)--Prices of longer-dated Treasurys fell Tuesday afternoon as investors prepared for details of another bout of record-sized debt supply and the outcome of the Federal Reserve monetary policy meeting.[21]

NEW YORK (Reuters) - The U.S. economy has been kick-started into growth but stock investors still face an uncertain outlook as Wall Street gears up for comments from the Federal Reserve and a key report on employment this week.[22]

SINGAPORE: According to economists, the U.S. Federal Reserve is likely to retain its accommodative monetary policy stance up till at least the first half of 2010. They added that despite the U.S. economy posting its first positive GDP numbers in a year for the third quarter, other key indicators like consumer consumption and unemployment rate have not been faring as well.[23] Government-supported spending on cars and homes pushed the U.S. economy's growth into positive territory at a 3.5 per cent annualised rate in the third quarter. While this is the best growth seen in two years, analysts said it will not be enough to sway the Federal Open Market Committee into changing its monetary policy stance. David Cohen, director of Asian Economic Forecasting, Action Economics, said: "That offered some encouragement that maybe the recession is finally ending. That is balanced by the fact that the unemployment rate is climbing higher. "Everyone is going to be watching this week's monthly report, likely to show further decline in payrolls, unemployment rate edging up to maybe 9.9 per cent.[23]

"The common belief right now is that the economy will move forward in the fourth quarter, but probably at a little slower pace than in the third quarter." Financial markets are bracing for a possible change of wording in the Federal Open Market Committee's statement, expected on Wednesday at the end of its two-day meeting, that could hint interest rates are headed higher late next year. That, and any hint the Fed may start to pull back some of the liquidity it has been providing to markets through its debt purchases, could hurt stocks. "If you got language along those lines that suggested that they could be raising maybe a little bit earlier than what folks were expecting, then yes, I would expect the market to sell off on that news," said Thomas Wilson, a managing director in the institutional investments and private client group at Brinker Capital in Berwyn, Pennsylvania.[22] Since oil is largely bought and sold in dollars, investors holding stronger currencies can buy more crude for less and have done so in recent months, sending the price of benchmark crude above $80 near the end of October. Though the central bank isn't expected to take any action on interest rates, statements issued after such meetings can hint at the Fed's take on the state of the economy.[24] The U.S. economy grew for the first time in a year in the third quarter, at a 3.5 percent annual rate largely the result of government stimulus spending, official data showed Thursday. The Fed "may begin to lay the groundwork for the central bank's eventual exit from financial markets in its statement," said Joseph Brusuelas, analyst at Moody's Economy.com.[7] "The markets will undoubtedly look beyond the actual interest rate announcement, and focus instead on the tone and wording of the actual communique," said Millan Mulraine, analyst at TD Bank Financial Group. "In this regard, we expect the economic outlook to remain largely intact, with the Fed reiterating the improved outlook for the U.S. economy, reflecting in part the encouraging tone in the recent economic reports, and in particular the policy-induced surge in GDP in Q3," he said.[5] Stocks lead profits, which lead the economy. The Fed undoubtedly did its part to ignite the rally. Now it is in the hands of a very conservative U.S. corporate landscape that has re-built their balance sheets to pristine status. The resiliency of the U.S. consumer continues to be doubted and all of this is occurring in a low interest rate and low inflation atmosphere. That means it's a good time to own stocks. Belski: Our stance is that the Fed is doing a great job; we believe Bernanke is very data and fundamentally driven and will be a lot closer to the actual turn in the economy and inflation than his predecessor.[25] The Fed will conclude a two-day meeting on Wednesday and is expected to end with a reaffirmation that policies to support the economy will stay in place for some time, even as signs of recovery mount. The Fed is not expected to soften its commitment to hold benchmark interest rates exceptionally low for "an extended period."[26] We do not expect major changes in the FOMC statement. While officials are reportedly thinking about how they might eventually modify the language regarding future interest rates, a change at this meeting is quite unlikely. With the economy turning up, the markets are on high alert for rate hikes from the Fed. Every time an FOMC hawk says that "the Fed will need to raise rates sooner rather than later" or Fed staff talks to the Street about technical issues around its exit strategy, the chattering class gets excited.[3] "The signals don't'' come from Reserve Bank Presidents or advisers," Harris wrote in a note to clients. "They come from either the overall committee in the form of the official statements or from the core of the committee that means (Chairman Ben) Bernanke, (Vice Chairman Donald) Kohn, and to a lesser extend, New York President (William) Dudley." The Fed starts its two-day policy-setting meeting on Tuesday, and Harris is certainly not alone in thinking they'll stay the course, keeping benchmark interest rates near zero.[27] "We had very strong data today which raises the risk that we might have a further sharp narrowing in the non-farm payroll job declines" said Josh Stiles, bond strategist at IDEAglobal in New York. "We have some risks in the Treasury market in that the (Federal Reserve) might tone down its statement a little bit," in terms of keeping interest rates at the current ultra-low level near zero for an extended period, Stiles said.[16]

Mostly, the Fed is not expected to increase interest rates from the current range of 0-0.25%, but the options market is already anticipating changes in the value of U.S. government bonds. Far out out-of-the-money puts on the iShares 20+ Year Treasury Bond Fund (ticker: TLT), an exchange-traded fund that invests 95% of its assets in long-term U.S. government bonds, has increased in value relative to at-the-money puts. This suggests that investors are worried that the price of the bonds will decline.[8] The most liquid assets the Fed could sell are U.S. Treasurys, of which it holds $773 billion. That is far less than the $1.325 trillion required to undo the monetary expansion. Even if the Fed manages to offload all its Treasurys, it still has to collect $552 billion of base money. What's more, the Fed will most likely have to accept discounts on the price of its bonds, which will make it even harder to collect the base money. Just how could the Fed collect the remaining half trillion U.S. dollar? It could cancel the Commercial Paper and Money Market Funding Facilities, terminate its liquidity swap agreements and liquidate foreign assets. Even if all these operations could be executed at current market prices, the Fed would still be short of collecting $356 billion of base money.[28]

William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida, said the FOMC's policy statement is particularly in focus in the bond market "where there has been talk that the Fed could change the wording in the statement to lay the foundation for tighter monetary policy at some point in the future." Despite some improved data on the housing and industrial sectors, the economic recovery process is "tenuous" and would be hurt by tighter monetary policy, he said. "If there's any hint from the Fed that they want to withdraw liquidity, it will be received very negatively by both the marketplace and the business community," Sullivan said.[18] Economists and traders will be poring over the accompanying FOMC statement for signals of the central bank's outlook on the sustainability of the nascent recovery and the direction of monetary policy.[7] Acute attention will be paid to any new flourishes in the Fedspeak found in the central bank's statement on monetary policy, due out Wednesday afternoon.[25]

Trick or treat has passed for kids, but it begins today for grown-ups. The Federal Reserve's interest-rate setting committee gathers today, and updates the world at 2:15 p.m. Eastern time Wednesday on its latest thinking on interest rates and economic conditions. The European Central Bank, and Bank of England also meet this week. [8] DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: At roughly 400 words, the statement of the Federal Reserve's interest rate setting committee is one of the most closely read documents in the world. Anyone looking there for major changes in wording or big hints about the future is likely to be disappointed this week.[29]

The Federal Reserve's key policy committee today finished up the first day of a two-day meeting on the economy and interest rates.[29] Treasurys were also under pressure because of uncertainty about what the Federal Reserve will say about the economy on Wednesday as it wraps up a two-day meeting on interest rate policy.[30]

Oil prices rose Tuesday as the Federal Reserve began a two-day policy meeting on interest rates.[24]

CHICAGO (Dow Jones)--Short-term U.S. interest rate futures markets reflect expectations that the Federal Reserve won't dramatically alter its near-zero interest-rate policy on Wednesday.[31]

Trading was cautious ahead of announcements from the Federal Reserve on interest rates and details on the next round of auctions. In late trading, the 10-year Treasury, often used as a benchmark for consumer borrowing, fell 14/32 to 101 8/32, pushing its yield up to 3.47 percent from 3.42 percent.[30]

The session proved modestly volatile, and most of the selling came in the back end of the yield curve. Market participants cited some reluctance to take on bigger positions, with the Federal Reserve meeting this week, in a decision that won't end up with a change in rates but could bring alterations in how officials view the monetary policy outlook.[32] A bevy of corporate bond sales, Berkshire Hathaway Inc.' s (BRKA, BRKB) takeover of railroad operator Burlington Northern Santa Fe Corp. (BNI) and the start of the Federal Reserve monetary policy meeting kept credit markets busy Tuesday.[33]

WASHINGTON -- With the economy improving but lasting recovery still far from assured, the Federal Reserve has little room to maneuver. Expect few changes of substance in the Federal Open Market Committee's policy statement when its two-day meeting ends Wednesday.[9] The changes in the Federal Reserve's statement are likely to focus on its observations about the economy. In September the Fed said "economic activity has picked up following its severe downturn," that "economic activity is likely to remain weak for a time," and that "the Committee expects that inflation will remain subdued for some time." The Fed is likely to brighten its language about the improving economy.[9] Warsh — a voting member of the Fed's interest-rate setting committee — doesn't have a reputation for being an "inflation hawk," but others in the "sooner-than-later camp" do. They include Richard Fisher, president of the Federal Reserve Bank of Dallas; Charles Plosser, president of the Federal Reserve Bank of Philadelphia; and Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who is a voting member this year on the Fed's interest-rate committee.[6]

WASHINGTON, Oct 30 (Reuters) - U.S. Federal Reserve officials are scheduled to meet with bank executives on Monday to discuss executive pay at large financial firms, a Fed spokesperson said on Friday. They would discuss "the process for the reviews of incentive compensation arrangements at the large, complex banking organizations", the spokesperson said.[34] WASHINGTON (Reuters) - The U.S. Federal Reserve is communicating to large banks its expectations and plans for rules to tailor pay for executives and key employees to risk, Fed Reserve Governor Daniel Tarullo said on Monday.[35]

The Federal Reserve's balance sheet has expanded enormously since the start of the financial crisis to $2.2 trillion from $875 billion leaving the Fed sitting on claims worth 15% of gross domestic product. The inflationary risks stemming from this expansion shouldn't be underestimated. The Fed has financed its balance sheet expansion almost exclusively by increasing the monetary base, or notes and coins in circulation plus banks' deposits. It may be difficult to undo that move because it requires the Fed selling a substantial amount of mortgage backed securities and other assets.[28] WASHINGTON — The Federal Reserve is gathering the heads of the largest banks it supervises Monday to discuss its proposal to limit incentive pay and bonuses to promote financial stability, a Fed official said.[36]

Harris, a former Federal Reserve Bank of New York economist, said much of the recent hawkish commentary has come from presidents of the regional Fed banks, and that may not be indicative of the thinking on the Fed's board.[27] Mr. Sack, 39 years old, is an economist who runs the markets group at the Federal Reserve Bank of New York.[37]

The discussions, which were held in private, involved some of the top officials in finance, people familiar with the matter said. J.P. Morgan Chase & Co. Chief Executive James Dimon, Goldman Sachs Group Inc. CEO Lloyd Blankfein, Citigroup Inc. CEO Vikram Pandit and Morgan Stanley CEO John Mack attended a 30-minute meeting with Federal Reserve Bank of New York President William Dudley, these people said.[11] NEW YORK (Dow Jones)--Treasurys prices were modestly higher early Tuesday, as the Federal Reserve kicked off its penultimate policy meeting for the year.[38] Reporting from Washington and New York - The Federal Reserve on Monday gave Wall Street's top bankers a Feb. 1 deadline to submit proposals for how they plan to improve their pay practices, people with knowledge of the meetings said.[10]

Markets can adjust extremely fast, with the potential to upset a lot of positions. Chris Rupkey, chief economist at Bank of Tokyo-Mitsubishi in New York, noted that in June 2004, when the Fed first raised its target rate from the then-historic low of 1%, the three-month Eurodollar rate shot to 4.39%. That's 18 months before the Fed's rate got there, and two years before it peaked at 5.25%. That overshoot came despite possibly the most orderly and well-advertised tightening cycle in central-bank history, in which rates ratcheted up a quarter percentage point per meeting for two years. "It missed the Fed's final tightening move by, but on the other hand it did get priced in ahead of time," Rupkey said.[39] "Anybody who expects major changes to the Fed's statement is likely to be disappointed," said Stephen Stanley, U.S. economist at RBS. Fed officials, who meet on Tuesday and Wednesday, could discuss how they will prepare markets for an eventual policy shift, but analysts say it is too soon for the Fed to even hint toward an exit by tweaking its pledge to keep rates extraordinarily low for an "extended period."[1] At issue is whether more hawkish members of the Federal Open Market Committee, the Fed's policy arm, will manage to make the Fed statement slightly less dovish by removing the word "extended" from the Fed's current commitment to keep interest rates low for an extended period.[16] Most analysts at top U.S. banks expect the Fed's policy-setting Federal Open Market Committee to keep interest rates on hold until mid-2010 or later, though interest-rate futures markets are pricing in an increase earlier in 2010.[1] Not a happy backdrop for the bimonthly meeting of the Federal Open Market Committee (FOMC) to decide U.S. interest rates.[40]

The U.S. central bank wraps up a two-day meeting Wednesday and is expected to hold interest rates at historic lows near 0%.[20]

"Federal Reserve officials will be meeting with bank executives Monday to discuss the process for the reviews of incentive compensation arrangements at large, complex banking organizations," a central bank spokesman told AFP. On October 22 the Fed released recommendations calling for banks to ensure their compensation polices "do not undermine the safety and soundness of their organizations."[36] Some Federal Reserve members are concerned that rising prices could become a problem sooner, rather than later. This could show up in the statement. When the Fed makes big moves, officials will usually hint at this in speeches before the meetings. Eventually the Federal Reserve will start talking more about its strategy for winding down all its programs. In speeches, officials have talked about the technical details of how they will shrink the Federal Reserve's balance sheet.[9] Former Fed Vice Chair Alice Rivlin is expecting only minor tweaks in the statement, beginning with a nod to reports the economy is growing again. ALICE RIVLIN, FORMER VICE CHAIR, FEDERAL RESERVE: That's good, but other things are not so good.[29] The focus is likely to be on any change in wording on the Fed's exit strategy to unwind the massive stimulus as the economy heals. Many portfolio managers, worried about the impact of the Federal Reserve's removal of its market props, already are turning their.[33]

The federal reserve is nothing more than arrogant cabal of for profit at all costs bankers who could care less about unemployment and the economy. The government through its own inaction has allowed the federal reserve to abuse its authority, commit fraud, steal from the taxpayer, and to enter into illegal contracts/swaps/treaties with foreign central banks. It is a continual disgrace that the DIJ, FBI, Meida, and judicial system have colluded to keep the truth about the federal reserves' illicit activities from the american people.[27] The Federal Open Market Committee, the U.S. central bank's policy-setting group, will meet on Tuesday and Wednesday. Monday's encouraging data on manufacturing and housing eased some worries that the U.S. economy could shrink again, but they were not robust enough to bolster optimism that growth will accelerate and more companies will hire again.[2] The Federal Open Market Committee, the central bank's policy setting group, meets on November 3 and November 4.[4]

March federal funds futures FFHO hit a contract high on Monday, suggesting traders see no chance the Fed will raise rates in the first quarter of 2010. The unprecedented rate policies adopted by the Fed, the Bank of England and the European Central Bank have resulted in ultra-low borrowing costs for banks, which have helped them to make money and repair their balance sheets.[2] The U.S. central bank hopes to prevent the type of reckless behavior that led the U.S. financial system to the brink of collapse last year. The Fed last month issued proposed guidelines on how the largest banks should reform their compensation practices, and Monday's encounters were meant to kick-start the process.[12] The Fed and U.S. Treasury unveiled last month a set of curbs and rules for executive compensation at banks, aimed at reducing the excessive risk-taking that contributed to the global financial crisis.[41] Lavish pay and bonuses at financial institutions are blamed for encouraging excessive risk taking that fueled the global credit crisis that brought the U.S. financial sector to the brink of collapse a year ago. The Fed proposed that its supervisors review 28 large, complex banking organizations to determine whether their policies are in line with its principles for risk-appropriate compensation incentives.[36]

The Fed last week issued bank pay guidelines aimed at curbing the type of reckless risk-taking officials say contributed to the crisis that nearly brought down the financial system last year. Fed Governor Daniel Tarullo told Congress this week that the Fed would supplement those recommendations with "supervisory initiatives to spur and monitor" industry reforms.[34] Departing Bank of America Corp. CEO Kenneth Lewis wasn't on the call with the Richmond Fed, but other bank officials were. "We will certainly work with them and provide whatever information they require," said a Bank of America spokesman. White House and Fed officials argue that poorly designed pay packages were one cause of the financial crisis, because they misaligned incentives for bankers and encouraged employees to take too many risks. People familiar with the meetings didn't describe them as confrontational or combative.[11] Fed officials want banks to rely more heavily on deferred compensation, and bonuses awarded as stock, to discourage risks that could lead to short-term gains, but long-term pain.[12]

Among top Fed officials a debate has broken out about how soon the central bank will need to act to nip inflation in the bud, although none are advocating a move now.[1] The Fed has leeway to do so because inflation thus far has been low, economists said. Whenever the Fed decides to drop this "extended period" language, it will be taken as a signal that the central bank is preparing to reverse course.[6] BofA Merrill''thinks it will be the European Central Bank that hikes before the Fed. "The bottom line is that faced with roughly the same economic backdrop very low core inflation, moderate headline inflation and a large but slowly closing output gap we expect the ECB to be more hawkish than the Fed," they wrote.[27]

Klaus Adam, an economics professor at Mannheim university and former principal economist at the European Central Bank, says unwinding the interventions may prove especially difficult if inflation comes in fast.[28]

"I expect the chance of the Fed keeping the wording 'for an extended period' is higher than the central bank changing it," said Izuru Kato, chief economist at Totan Research.[26] Jefferies & Co.' s derivatives strategists, led by Pat Neal, note that the Fed has bought 23% of the notional value of newly issued Treasuries. "It's possible that yields start to trend higher, as the large bid to the market is no longer relevant," the strategists told clients Tuesday. In the markets, specialists and market makers typically adjust prices when they know a major buyer or seller is waiting on the sidelines. With the central bank buying Treasuries, dealers will tend to increase prices because they know someone is waiting to buy.[8]

Rising unemployment, cautious consumers, tight credit and troubles in the commercial real estate market are among the forces expected to weigh on the recovery going forward. Against that backdrop, most economists think the Fed on Wednesday will keep the target range for its bank lending rate at zero to 0.25 percent.[6] Economists underscored that inflation remained tame amid the fragile recovery, well within the Fed's comfort zone. "The inflation outlook should also remain unchanged, with the committee noting that it expects inflation to remain'subdued,' on account of the'substantial resource slack' and stable longer-term inflation expectations," said Millan Mulraine, analyst at TD Bank Financial Group.[7] Many analysts think the Fed could start to raise rates in the spring or summer. Given the delicate state of the recovery, Bernanke made clear last month that he's in no rush to boost rates and reel in the unprecedented amount of money the Fed has plowed into the economy. Other Fed policymakers, however, have suggested that rates might have to go up sooner rather than later. "If policymakers insist on waiting until the level of real activity has plainly and substantially returned to normal — and the economy has returned to self-sustaining trend growth — they will almost certainly have waited too long," Fed Governor Kevin Warsh warned in a speech just days after the Fed's Sept. 22-23 meeting. It promises to be a high-wire act for the Fed. Boosting rates and removing supports too soon could short circuit the recovery, while holding rates low and keep supports intact for too long could unleash inflation.[6] The Fed meeting comes as economic data gives mixed economic signals on the strength and sustainability of the world's largest economy, but with a generally positive bias. The FOMC has held its base rate target near zero since last December in a bid to help kick-start the economy out of the worst downturn since the Great Depression.[7] The Fed's survey of the economy ahead of the FOMC meeting the 'Beige Book' found employment trends are still weak and improvement in economic conditions'scattered and modest' at best. It's too early to call any recovery.[40]

"Prices initially fell on the stronger-than-expected ISM construction and pending sales figures but quickly rebounded," Canavan said. He said the market was focused on economic data yet to come this week, including non-farm payrolls on Friday, and details of the Treasury's fourth-quarter refinancing, to be announced later on Monday, and on the Fed's policy meeting.[15] Analysts widely expect the Fed will keep key interest rates at historical lows, but any details it provides about when it might start raising rates again could affect Treasury prices.[30] The two-year Treasury yield, the most sensitive to official rate moves, has held in a relatively tight range of 0.85%-1.05% for the past couple of months, convinced by the Fed's mantra that economic conditions warrant "an exceptionally low" target rate for "an extended period."[39]

In the three months it took to raise the target rate one percentage point, to 4.25%, the two-year yield had covered more than twice that distance, up 2.25 percentage points at 6.25%. A transparent strategy may help, but to avoid upending still-fragile markets and the gradual economic recovery, the Fed will need to hone its market-handling skills. If policy makers start increasing rates too early, "the market would really punish them for it," MF's Galante said.[39]

An unusually large number of options trades on Tuesday signaled that market participants are either hoping to profit from, or reduce potential losses in case the Fed indicates that rate hikes will come at a quicker-than-expected pace. On the eve of the Federal Open Market Committee's next policy decree, federal-funds futures saw the panel keeping its key short-term funds rate steady through most of the first half of 2010.[31] Investors were keenly awaiting the policy statement from the Fed's Federal Open Market Committee due for release on Wednesday afternoon at the end of the FOMC's two-day meeting.[18] Economists and traders will be poring over the Federal Open Market Committee statement released after the meeting in search of signals for the direction of monetary policy. "The Federal Open Market Committee will use its post-meeting statement to acknowledge the recession has ended and revise its near-term forecast to reflect the better tone of the data," said Joseph Brusuelas of Moody's Economy.com.[5]

Market analysts on Wednesday will put the Fed's Federal Open Market Committee's statement under a microscope.[16]

Traders and analysts point to one factor as the cause: the Federal Reserve's efforts to flood the financial markets with dollars. They say the Fed has created an unusual environment where investors essentially have two choices -- hold onto dollars or buy.[42] Washington, Nov 02 2009 November 2, 2009 - Federal Reserve Governor Daniel Tarullo said that the Fed decided to employ principles rather than 'generally applicable rules' when drafting its executive compensation guidance released less than two weeks ago.[43] The U.S. Federal Reserve's "extensive" review of executive compensation at the country's 28 largest banks will begin shortly, Federal Reserve Governor Daniel Tarullo said Monday.[41]

The Federal Reserve told big U.S. banks yesterday that draft pay guidelines aimed at curbing excessive risk-taking will have to be followed in this year's round of bonus payments, even though the rules do not officially come into force until 2010.[44] WASHINGTON (Dow Jones)--The sharp headwinds facing U.S. banks are far from over, a Federal Reserve official said Monday, suggesting the difficulties in the commercial and residential loan markets are far from over.[45]

TOKYO, Nov 4 (Reuters) - U.S. Treasuries were largely unchanged in Asia on Wednesday, sitting tight ahead of the outcome of a Federal Reserve policy meeting and a Treasury refunding announcement later in the day.[26] Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics.[28] The Federal Reserve pumped $1 trillion into the financial system during a year of harried efforts to rescue the economy.[37]

The options could be anticipating that prices will decline because the Federal Reserve has just completed a $300 billion Treasury purchase program.[8]

The group runs the Fed's trading, making it the bridge between the marble corridors of the Federal Reserve in Washington and the bustling trading floors of Wall Street.[37] As it turns out, other major central banks in the world have similarly sized balance sheets as the Federal Reserve.[28] BofA Merrill''Lynch Global Research economist Ethan Harris thinks all the talk of a Federal Reserve rate hike is just that talk.[27] Regardless of how gently or aggressively the Federal Reserve ends up raising rates, the success of the operation will be dictated by its stewardship of financial markets.[39] The Federal Reserve has massively boosted its balance sheet in response to the financial crisis.[28]

Washington, November 2, 2009 - Federal Reserve Associate Director of Banking Supervision and Regulation, Jon Greenlee, said in testimony today that those large regional and community banking firms building up 'unprecedented concentrations of CRE loans' will be particularly affected by emerging conditions in real estate markets.[46] The federal reserve is the single biggest threat to the United States of America. These evil appointed banker reject peons have stolen trillions on behalf of their banking buddies like Goldman Sachs and JP Morgan. They have managed coerce Congressman Mel Watt of Charlotte, NC to gut Ron Paul's HR 1207 that would have audited the federal reserve.[27]

With nearly 10 percent of the labor force out of work, consumer spending -- the main driver of the U.S. economy and key to a sustainable recovery -- remains challenged. The FOMC has held its federal funds rate target at zero to 0.25 percent since last December in a bid to help kick-start the economy out of the worst downturn since the Great Depression. [5] Until that view changes, economic performance will remain subpar and policy rates will remain low for an extended period," said Patrick O'Hare at Briefing.com. "The U.S. economy has a pulse fortunately, yet it's a long way still from having a strong heartbeat because it has such low blood pressure."[7] In essence it is about trying to revive and sustain consumer confidence and spending, which after all is the engine of U.S. economy." He added that inflation, which tends to rise during periods of lax monetary policy, has so far hovered at comfortable levels. Analysts noted that countries which have fared better than expected this downturn - such as India and China - have signalled that they may tighten monetary policy soon.[23] Even as the U.S. economy appears to be still in need of Fed support, the repercussions of emergency monetary policies are being felt around the world. Brazil has acted to stem the flood of speculative capital to its economy by adopting a 2 percent tax on foreign investment. Other nations have begun to intervene to keep their currencies from rising too sharply against the falling dollar.[1] Even if markets were to absorb the assets which is unlikely it'd happen only at sizable discounts that could potentially wipe out the Fed's equity. The increase in the monetary base since June 2007 amounts to $1.325 trillion over 9% of U.S. GDP. Fully undoing this expansion requires the Fed selling assets worth this very same amount, thereby withdrawing money from the economy.[28]

"Probably the most important variable will be the unemployment. Now that GDP appears to have started growing, which would be one indication that the recession is ending, so they'll be sensitive to unemployment rate, I think," said Mr Cohen. "But if economy continues to grow and unemployment rate eases before mid next year, the Fed would start to tighten rates some time possibly as early as the first half next year," he added.[23] "The Fed has some glide time right now to see where the economy is going," said Wells Fargo's chief economist John Silvia.[6]

Investors will be looking to the Fed's statement for clues as to when it will to begin to remove stimulus funds it has pumped into the economy. While bonds are perceived as attractive investment as safe havens, Larkin said a hint that the Fed will unwind its liquidity in the market soon would be problematic.[20] The Fed's policy statement could signal fewer liquidity measures for markets, while nonfarm payroll data and the Institute for Supply Management surveys on the manufacturing and services sectors will give early indications of how the economy is faring in the fourth quarter.[22] The Fed is due to release a statement Wednesday afternoon on the latest outlook on inflation and the economy.[33] Kato, however, sees a chance that the Fed will change the wording in the near future. The reasons for this are improving Fed views on economic conditions compared to March, a risk that the current statement may be causing an excessive rise in commodities and a weak dollar, and increasingly cautious voices among FOMC members about inflation risk, Kato wrote in a note to clients.[26]

Interest-rate markets, from Treasurys to swaps and futures, can be counted on to overshoot the Fed's first move, even in a relatively transparent tightening cycle. It's their job to anticipate policy shifts, as the leading tools for large corporations and financial institutions to guard against losses on changes in their borrowing costs.[39] At the Fed's meeting in August, policymakers agreed to gradually slow the pace of another program to buy $300 billion in Treasury securities. It decided to shut that program down at the end of October, a month later than previously scheduled. That program is designed to force rates down for mortgages and other consumer debt to get Americans to spend more.[6] The Fed's five-member Board of Governors, which includes Bernanke and Warsh, are always voting members of the committee.) Beyond rates, Fed officials — at their meeting in late September — were conflicted over whether to expand or cut back a program intended to drive down mortgage rates and prop up the housing market, according to minutes of the closed-door deliberations.[6]

The Fed has artificially kept the interest rate low.Of course,there is a lot of inflation,but they do not want to acknowledge that because the insiders are the wallstreet people who want the stocks to go up.If they raise the interest rate(which they must),then wallstreet does not like it.Therefore,the feds are not going to raise the interest rate in the intersest of the wallstreet people.[27] GERSH: Rivlin adds the Fed is unlikely to change course and raise interest rates substantially before the employment outlook has clearly turned.[29] With these programs winding down as scheduled, the Fed's other tool is the interest rate.[9]

Treasury rates are pricing benchmarks for the credit markets: A sharp jump could send companies' borrowing costs rocketing, at a time when alternative funding from banks is still hard to come by. More importantly, higher borrowing costs would be a fresh blow to the large swathe of the community that can't hedge the credit card holders, home- and small business owners whose interest rates never got anywhere near zero, if they fell at all.[39] In normal times, it buys and sells Treasury securities to influence the level of interest rates.[37]

The talk around the FOMC table is hardly likely to be about any rate action. What's been the payoff for the huge injection of funds and guarantees for America's biggest financial institutions? The U.S. Treasury Secretary, Mr Timothy Geithner, says they've become 'dramatically more stable'. He was one of the architects of the banks' rescue package at the height of the crisis. He is having a hard time defending their performance since.[40] "The FOMC remains the immediate focus leading to position-adjustment trading," said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York. The benchmark U.S. 10-year Treasury note US10YT=RR traded up 3/32 in price while its yield eased to 3.41 percent from 3.42 percent late on Monday. Two-year notes US2YT=RR rose 1/32, their yields easing to 0.90 percent from 0.92 on Monday.[17] "The setup for supply next week is getting under way, and that is why the market is moving the way it is," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore. The benchmark U.S. 10-year Treasury note US10YT=RR traded 15/32 lower in price, with its yield rising to 3.48 percent from 3.42 percent late on Monday. Thirty-year bonds US30YT=RR, which were in the plus column early in the session, traded down 1-10/32, with their yields rising to 4.33 percent from 4.26 percent on Monday.[18]

"You're seeing some pre-FOMC positioning and pre-refunding announcement positioning," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The benchmark U.S. 10-year Treasury note US10YT=RR, which had been up 3/32 in price, was down 7/32, its yield at 3.44 percent versus 3.42 percent late on Monday.[19] The benchmark U.S. 10-year Treasury note US10YT=RR traded 12/32 lower in price to yield 3.43 percent, up from 3.39 percent late on Friday, while two-year notes US2YT=RR traded 2/32 lower to yield 0.93 percent from 0.90 percent.[16]

"We've had a reversal of some of last week's gains in Treasuries and a reversal of some of last week's losses in equities," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The benchmark U.S. 10-year note US10YT=RR, down 7/32 in early dealings, expanded its loss to 16/32 after the release of data on U.S. manufacturing, construction and pending home sales. It subsequently erased much of the loss and yielded 3.41 percent, up from 3.39 percent on Friday. The 30-year bond US30YT=RR, briefly down a full point, was off 13/32 just before midday, its yield at 4.25 percent, up from 4.23 percent on Friday.[15]

NEW YORK (Dow Jones)--Prices of Treasurys remained lower late Monday morning as a round of upbeat U.S. economic data in the manufacturing and housing sectors encouraged investors to buy riskier assets including stocks and sold low-risk government debt.[47] Investors are nervous that monetary and fiscal stimulus measures may be ended too soon. "If the government pulls out too early and they are not spending, (and) the consumer is not spending, you've got a big issue," said Anthony Conroy, head trader for BNY ConvergEx, an affiliate of the Bank of New York. The bankruptcy of CIT Group Inc CIT.N on Sunday will also feed pessimism about the economy this week, traders said.[22]

Signs of economic recovery could bolster investors' risk appetite to the detriment of bond prices while any signs the recovery is faltering could boost the safe-haven appeal of government debt. The most influential U.S. economic report this week is the October nonfarm payroll report due Friday.[17] NEW YORK (Dow Jones)--Treasurys prices sank heavily heading toward noon Tuesday as a raft of municipal debt issuance sapped bids from the government bond market.[48] NEW YORK (Dow Jones)--Treasury prices fell Monday in the wake of a report that showed a better-than-expected expansion in the factory sector last month, boosting prospects for overall economic growth.[32]

NEW YORK — Treasury prices continued to drop Tuesday as stocks reversed early losses.[30] Kim Rupert, managing director of global fixed income analysis at Action Economics, said Treasury prices slipped as investors started to buy into the stock market.[30] U.S. stocks slumped on Friday in a stark reminder that investors remain highly sensitive to signs of economic weakness. The Standard & Poor's 500 Index.SPX closed out its first down month in eight on October's final trading day as investors questioned the sustainability of the rally.[22] The number of jobs cut by U.S. employers is expected to have fallen in October. A negative surprise like last month, when the unemployment rate hit its highest level in 26 years, could undermine confidence in the economic recovery, driving stocks lower.[22] Despite signs factory activity is picking up, the U.S. consumers who normally account for around 70 percent of the economy's growth, are facing major challenges. Chief among them is a jobless rate currently hovering at a 26-year high just below 10 percent, which is expected to continue climbing into next year.[4] The silver linings for the U.S. economy are that China and India are recovering strongly and the weak dollar is export-stimulative. Besides, after years of living beyond his means, the average American is starting to run down his debt and save. These may be just the right long-term prescriptions for a more stable economy and financial system and a lasting solution to global imbalances.[40] Even the ISM employment index, long in contraction territory, turned positive, indicating the first inklings of a willingness to hire. "Given the fairly good performance of this indicator in predicting the performance of the U.S. economy more generally, it is pointing to further upward momentum in U.S. economic activity," said Millan Mulraine, economics strategist at TD Securities.[4] The good news on the economy on Monday included the Institute for Supply Management's factory index, which showed U.S. manufacturing grew for the third straight month.[16]

The third quarter GDP report on Friday signaled the end of the worst U.S. recession since the Great Depression, but government stimulus, including the "cash for clunkers" incentive for auto purchases and a $8,000 tax credit for first time homebuyers, helped prop the economy up.[4] Rates may go up not because economy is getting better, but because people do not want to lend to U.S. government anymore.[39]

Joshua Zumbrun, 11.04.09, 06:00 AM EST The economy is improving, but probably not enough for central bank policy to start changing. [9] Financial markets will comb through the central bank's policy statement, which will be released at around 2:15 p.m. EST (1915 GMT) on Wednesday, for any clues on when the easy money period will start drawing to a close.[1] Dated bonds slip as investors wait for central bank's statement due Wednesday.[20]

The central bank was not divided over another part of program to buy $200 billion worth of Fannie and Freddie debt. It has bought $141.6 billion so far. The program has helped to prop up the housing market, but its health remains precarious.[6] In certain cases, the central bank "may require" an organization to develop a corrective action plan to address unsatisfactory compensation policies.[36] For instance, in August 2009 the European Central Bank's balance sheet has reached a comparable level of about 16% of GDP and the Bank of Japan's balance sheet amounted to 22% of GDP, suggesting that the problem may be a global one.[28]

The review process is expected to include staff from the Fed's board, from the reserve banks that supervise the big banks and from other financial regulators, Tarullo said. [41] The Fed last month issued guidelines on how the country's 28 largest banks should control pay for executives and key employees to curtail the kind of recklessness that contributed to the devastating financial crisis that hit in 2007.[35] The call for a speedy implementation of the proposals underlines the Fed's desire to change Wall Street's pay practices and stave off a public backlash ahead of what promises to be a bumper bonus season at many banks.[44] Federal regulators, who have concluded that the financial crisis was caused in part by inappropriate pay practices on Wall Street, have held numerous discussions with large banks about restricting executive pay.[10] Recent news Goldman Sachs Group Inc ( GS.N ) had set aside $16.8 billion for compensation, so soon after repaying $10 billion in taxpayer money, fueled concerns Wall Street was already returning to lavish pay practices commonplace before the financial crisis.[12]

Many market participants including Ward McCarthy, chief financial economist within the fixed income group at Jefferies & Co., and James Caron, head of interest-rate strategy at Morgan Stanley in New York, expected $1 billion increase.[21] "The ISM was particularly strong, but it doesn't change the outlook on rates," said Thomas Simons, money market economist at Jefferies & Co in New York.[2]

"Everyone agreed and Dudley said 'that's a good point and we will focus on it,'" a source said. Top executives from Goldman Sachs Group Inc ( GS.N ), JPMorgan Chase & Co ( JPM.N ), Bank of New York Mellon ( BK.N ) and Credit Suisse Group AG ( CSGN.VX ) were among those participating, a source said.[13]

Stocks recovered some losses after Berkshire Hathaway Inc ( BRKa.N ) said it would buy railroad Burlington Northern Santa Fe Corp ( BNI.N ) for $100 per share in cash and stock, but a loss from UBS AG ( UBSN.VX )( UBS.N ) and news from Royal Bank of Scotland Plc ( RBS.L ) and Lloyds Banking Group Plc ( LLOY.L ) spurred a move into safe-haven U.S. Treasuries, Spinello said.[17] It pays to be cautious, as bargains are getting harder to find. Q&A WITH MARKO DIMITRIJEVIC: This hedge-fund manager still sees plenty of opportunities in emerging markets -- even after their big run this year. Progressive, one of the nation's best-run auto insurers is luring more customers with its innovative programs. Canadian banks are faring far better than their U.S. and European counterparts. Their stocks trade at a premium -- but they're worth it. Hyatt Hotels is likely to debut this week at a discount to what it's worth.[8]

The big U.S. banks are expected to present a plan that identifies where improvements to the pay structure are needed, and failure to submit or implement a satisfactory plan may lead to enforcement action, Tarullo said. "Our supervisory approach to compensation practices at LCBOs (large, complex banking organizations) will include an extensive horizontal review process, in keeping with our increased emphasis on this approach for the supervision of the largest institutions," Tarullo said.[41] "We are not waiting to begin the process of gathering information about compensation practices," Fed Governor Daniel Tarullo said at a conference on executive pay. "Today, in discussions across the country, we are communicating our plans and expectations to these firms, with particular attention to beginning this information gathering."[12] "What don't do is set specific pay caps, and that would be overregulating." The meetings were notable because of how they were coordinated across the U.S. Part of the Fed's goal of supervising pay plans is to line up the largest financial companies nationwide and compare them with each other. Mr. Tarullo, a key architect of the proposal, said in his speech that the meetings were meant to deliver "our plans and expectations to these firms, with particular attention to beginning this information gathering."[11] Tarullo, who has helped lead the Fed's efforts, said pay at large firms warrants particular attention because flaws in compensation schemes could cause pain throughout the financial system, as the crisis demonstrated.[12]

The end game is to dump it all on the American citizenslet the folks who rig the system (politicos, central bankers and their friends) make trillions even thought their investments didn't workgotta love ityou earn a profit no matter how idiotic your investments are. This was the tragedy of the Feds taking on backstopping Freddie and Fannie (and why they did). In the end the Fed has to sell these assets at a major loss but since they are backed by the taxpayers now (funny I remember Barney Frank swearing that the tax payer would never be on the hook for these ponzi scheme GSCs).who gets the final bill-the tax payers. You know that this whole bailout game has been about moving the shells around enough and confusing the people so they don't know they are paying for it by a devaluation of the dollar (yes how will the Feds pay for the toxic assets.not by raising taxes-althought they might have to a little to calm the bond markets but by the Fed printing money to monetize the debt giving the Feds money to pay out the losses-end result is a major hit to the earnings and savings of the American people.you know the folks people like Bernanke and Washington/Wall Street take as suckers.[28] The Fed seems to have run out of rope. The best it can do is to continue its 'quantitative easing', involving outright Treasury bond buying and financing illiquid paper.[40] What's the matter are the illegal NWO FED and the thr rigged game globalist wall streeters having trouble coordinating their fraud to drain all U.S. taxpayers of the most money they can steal for their Bilderberger masters? Audit and abolish the FED and put Emeror Bernanke in jail along with his go fetch tax cheat treasury lackey boy SS adjutant Albert Speer look alike and GS enabler little Timmy Geithner. Good grief Charlie Brown, this is basic hades 101 stuff.[39] The two-year Treasury yield also overshot pretty radically in early 1994, when the Fed took a swifter course out of a prolonged recession.[39]

For now, Silvia and other economists also predict Fed policymakers will maintain a pledge to keep rates "exceptionally low" for an "extended period" to make sure the recovery gains traction.[6] Krugman arguing for the Fed to remain at zero rates for SIX YEARS. the economists on the left have gone nuts. This will give Bernanke ammunition to do what he does best - print more money.[39]

"If you learn anything as a student of depressions, it is that premature tightening is the kiss of death," says Ian Shepherdson, chief U.S. economist for High Frequency Economics. Fed Chair Ben Bernanke is not just a student of depressions, as a professor at Princeton he actually wrote textbooks about depressions.[9] Fed policy-makers and economists have said there are plenty of problems that could dampen economic growth, in particular high unemployment and a sluggish housing market.[2] GERSH: With unemployment high and factories operating at low levels, economists expect the Fed will see no signs market pressure is driving up inflation.[29]

Add up the uncertainty and economist Mark Calabria expects the Fed won't shift course tomorrow. MARK CALABRIA, DIR. FINANCIAL REGULATION STUDIES, CATO INSTITUTE: I do think there is going to be a reluctance on their part to really try to signal, because they don't want to panic the markets right now.[29]

"We expect a replay of the summer of 2008, when the ECB hiked in response to high headline inflation, but Bernanke held back the Fed for fear of fragile financial conditions.[27]

Fed chairman Ben Bernanke recently signaled there was no hurry to tighten monetary policy, saying action would be taken "when the economic outlook has improved sufficiently."[5] The market reaction to the removal of the most accommodative policy investors have ever seen, in place for almost a year already, could undermine the Fed's intentions. "Once the Fed starts to hike, the market's going to take matters out of its hands," said MF Global portfolio manager Don Galante.[39] The Fed's proposed rules, which won't be finalized until year's end, aim to prohibit banks from awarding incentives that drive traders, loan officers and others to take excessive risks that could threaten the bank's health.[11] "Two years into a substantial economic downturn, loan quality is poor across many asset classes and. continues to deteriorate," said Jon Greenlee, associate director of the Fed's division of banking supervision.[45] Reducing the monetary base to pre-crises levels would most likely require the Fed selling mortgage-backed securities in non-negligible amounts to the market, at least $220 billion. While these securities are guaranteed by Fannie Mae and Freddie Mac thus ultimately by the taxpayer it remains unclear whether the market is ready to absorb them in substantial amounts without asking for hefty discounts. Especially as these assets have maturities of over 10 years.[28] Bernanke and his colleagues agreed to slow down the pace of a $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac. Instead of wrapping up the purchases by the end of this year, the Fed said it would do so by the end of March.[6]

Now that the Fed is finished buying Treasuries, prices may decline in the absence of a major buyer, if all else is equal, which it never is. If this happens, yields on Treasuries, which move in the opposite direction of price, could increase. To be sure, the Fed won't complete its much larger program of buying over $1 trillion of agency mortgage-backed securities and agency securities in the spring. Some market observers suggest that the main impact from the Fed's securities purchases has not been so much to raise their prices but to lower the market's volatility, a factor which dampens options prices.[8]

The last two meetings of the FOMC have been blockbusters, as far as Fed meetings go. After its September meeting, the Fed announced it would wind down its $1.45 trillion intervention into the mortgage market, and in August, it announced it would wind down its $300 billion program to purchase government debt.[9] A Fed staff projection used by policymakers at the September 22-23 FOMC meeting showed unemployment holding as high as 9.25 percent by the end of 2010 and then falling to about 8.0 percent by the end of 2011.[7]

Even the folksy Midwestern billionaire's big deal announcement today can't completely wrench the market's attention away from the meeting of the Fed's interest rate-setting committee today and tomorrow.[25]

The Fed often waits at least several months after unemployment, a lagging indicator of recovery, peaks before beginning to raise rates.[7] Fed policymakers gather as the economy emerges from the worst recession since the 1930s to a much-awaited recovery.[6]

The FOMC meeting comes after official data showed last week the economy grew for the first time in a year in the third quarter, ending the worst recession in decades.[5]

The impact of Wednesday's statement will hinge on the phrase: "Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The committee may alter the language, swapping the term "extended period" for something like "some time" in its November or December statements.[25] The directive already includes the contingent language Woodford recommends. It says: "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."[3]

A rate increase isn't in the cards anytime soon, yet the debate is already under way over whether the Fed should raise its target rate off the historic low of 0%-0.25% in small or large steps. [39] Even small losses on the asset side have the potential to wipe out completely the Fed's equity. A 10% discount on its mortgage backed security portfolio, for example, would imply negative capital of about $25 billion. While negative equity isn't a problem as such, because the Fed can print legal tender, it means that the monetary base expansion will probably not be undone with inflationary pressures mounting. Overall, the outcome may be much more benign than suggested by these simple calculations. The money multipliers may recover only slowly so that the Fed can gradually sell its assets, thereby avoiding large discounts.[28]

Discounts pose a problem to the Fed that like an investment bank in pre-crisis times operates with a very small capital base.[28] GERSH: Rivlin agrees, saying there is too much time spent looking for hidden meanings in Fed statements. RIVLIN: They are carefully crafted, but there are a lot of people employed in what seems to me rather busy work -- guessing what the Fed means and what it will do next.[29] The big question now is what will the Fed say in the policy statement it releases tomorrow? Darren Gersh reports on what to expect and what not to expect.[29] We'll get a better snapshot of what's going to happen from the Fed's statement and employment data."[20]

"Incentive compensation arrangements should not create 'heads I win, tails the firm loses' expectations," Fed governor Daniel Tarullo said Monday in a Washington speech.[11] Given the complex and varying nature of activities found in large banking organizations, it was concluded that uniform requirements for compensation arrangements were not 'well-advised,' he said. It was determined that incentive compensation arrangements for senior executives were best balanced if they involved deferral payment in some form of equity and were ultimately tied to performance. This same arrangement would be less effective in aligning the incentives of mid- and lower level employees 'because these employees may view the outcomes of their decisions as unlikely to have much effect on the firm or its stock price,' Tarullo said.[43]

Stocks are back into negative territory. No one expects any rate moves to come from this week's FOMC meeting.[25] The Bank of England and ECB will hold policy meetings on Thursday and are widely expected to leave policy rates unchanged.[2] The unemployment rate hit a 26-year high of 9.8 percent in September, according to the latest official data, and is expected to reach double digits in the coming months.[5] On the economic indicator front, U.S. factory orders data due at 10 a.m. (1500 GMT) is expected show a 0.8 percent increase in September, reversing August's 0.8 percent drop.[17] The nonfarm payrolls data, due on Friday, is expected to show U.S. employers cut 175,000 jobs in October, according to economists polled by Reuters.[22]

Bonds hit session lows in prices following the data, the highlight of which was the monthly gauge of the manufacturing sector released by the Institute for Supply Management. It rose to 55.7 last month, the highest reading since April 2006, from 52.6 in September, beating the economists' forecast of 53.3.[47]

Economists predict it will hit 9.9 percent when the government releases the latest snapshot on employment conditions on Friday. It's expected to top 10 percent this year.[6] Song Seng Wun, regional economist, CIMB-GK Research said: "Recently, you have seen the lag effect of government spending in terms of fiscal stimulus packages, giving the economy a mild boost in third quarter and more so, private consumption. "It looks like, with confidence flagging because of uncertainty (in the) labour market, we have seen signs of pullback on consumer confidence. That could translate to weaker numbers in the coming couple of quarters.[23]

The government reports October labor data Friday, with most analysts expecting the jobless rate to rise to 9.9 percent. [5] If it does, commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay at about 3.25 percent, the lowest in decades.[6] Rates on 30-year loans averaged 5.03 percent, Freddie Mac reported last week. That was down from 6.46 percent a year earlier.[6]

Benchmark 10-year notes were steady in price from late U.S. trade on Tuesday to yield 3.473 percent US10YT=RR. Ten-year Treasuries note futures inched up 1/32 to 118-6/32 TYv1. [26] S&P 500 stock index futures opened slightly lower on Sunday and the U.S. dollar edged higher as news of the bankruptcy spurred traders to reduce risk-taking.[22] Treasuries slid on Tuesday as traders sold the bonds to make room for new supply that will arrive next week. The Treasury will announce the size and terms of those refunding auctions on Wednesday.[26] New supply will remain a consideration for dealers as the Treasury will also announce the terms of next week's three bond auctions on Wednesday.[17]

The Treasury Department is scheduled to release Wednesday morning the amount of next week's auctions in three-year notes, 10-year notes and 30-year bonds, part of the government's refunding announcement for the fourth quarter.[21]

Supporting Treasuries were the U.S. Treasury's lower projected borrowing need in the first fiscal quarter than forecast and an overnight rate increase in Australia that weighed on equities in Asia and Europe, analysts said.[17] "The treasury market is priced to perfection, but the stock market is overvalued and indicates a robust recovery.[20]

The Eurodollar market that offsets the impact of interest rate shifts on foreign exchange is priced for a 4% target rate by December 2013a very conservative guess. [39] Puts increase in value when securities decrease, which would happen if long-term interest rates rise.[8]

Even if rate hikes were in the offing, Brian Belski, chief investment strategist for Oppenheimer recently argued in a research note that rate hikes actually could be a rosy sign for investors. We shot a few questions to him via email. [25] To view or change all of your email settings, visit the Email Setup Center ]] Email Setup Center.[48]

With U.S. bank standards remaining quite restrictive at or near all time highs, i.e. hard to receive a load -' money is not changing hands as fast as most believe. [25] Many of the banks aren't expected to push back aggressively against the proposal, in part because it stops short of direct caps on pay. "It is balanced, and it is comprehensive," said Scott Talbott, senior vice president of the Financial Services Roundtable, a trade group representing large financial companies.[11]

SOURCES

1. Fed Seen on Hold as Outlook Uncertain - ABC News
2. MONEY MARKETS-U.S. rate futures signal Fed on hold pattern | Currencies | Reuters
3. Getting a Fix on the Fed - BusinessWeek
4. Fed to mull recovery, financial stability at policy meeting | U.S. | Reuters
5. AFP: Fed unlikely to change tack as recession ends
6. The Associated Press: Fed to hold rates at record-low, but cracks emerge
7. AFP: Fed likely to hold near-zero rates to spur recovery
8. Hedging Against Big Ben & Co. - Striking Price Daily - S. Sears - Barrons.com
9. The Fed's Holding Pattern - Forbes.com
10. Fed gives banks deadline to submit exec pay proposals -- latimes.com
11. Fed Pushes Bankers on Pay Overhauls - WSJ.com
12. WRAPUP 1-Fed summons bank CEOs to press for pay overhaul | Reuters
13. UPDATE 1-Banks meet NY Fed for pay rules -- sources | Markets | Europe | Reuters
14. Banks meet NY Fed for pay rules -sources | Markets | Markets News | Reuters
15. TREASURIES-Strong economic data dents demand for govt debt | Markets | Bonds News | Reuters
16. TREASURIES-Strong economic data hits demand for govt debt | Markets | Bonds News | Reuters
17. TREASURIES-Prices firm; weak equities spur safe-haven bid | Markets | Bonds News | Reuters
18. TREASURIES-Prices dip as traders prepare for supply, Fed | Markets | Bonds News | Reuters
19. TREASURIES-Prices turn lower, pre-Fed positioning cited | Markets | Bonds News | Reuters
20. Longer dated treasurys slip ahead of Fed statement - Nov. 3, 2009
21. Longer-Dated Treasurys Prices Down Before Supply Details,FOMC - WSJ.com
22. Goodbye to all that stimulus? | Reuters
23. channelnewsasia.com - Fed likely to maintain accommodative monetary policy stance till mid-2010
24. The Associated Press: Oil prices rise as Fed meets on interest rates
25. Analyst on Potential for Fed Rate Hikes: So What? - MarketBeat - WSJ
26. TREASURIES-Sit tight in Asia ahead of Fed, supply | Markets | Bonds News | Reuters
27. MacroScope » Blog Archive » Fed all talk, no action? | Blogs |
28. Guest Contribution: Fed Likely to Have Trouble With Exit Strategy - Real Time Economics - WSJ
29. Nightly Business Report . The Federal Reserve Prepares to Make a Statement | PBS
30. The Associated Press: Treasurys slide ahead of Fed, auction details
31. RATE FUTURES REPORT: Hedging Bets If Fed Signals Big Change - WSJ.com
32. Treasurys Slide As Data Look Good For Economy - WSJ.com
33. CREDIT MARKETS:Corp Bond Sales,Fed Meeting Keep Investors Busy - WSJ.com
34. UPDATE 1-U.S. Fed to meet bank execs on pay reviews | Reuters
35. Fed's Tarullo: Talking to banks about pay plans - Forbes.com
36. AFP: Fed gathers top bank execs for talk on pay, bonuses
37. Brian Sack Engineers Big Moves at Fed - WSJ.com
38. UPDATE: Treasurys Up Slightly On First Day Of Fed Meeting - WSJ.com
39. Markets Will Complicate Fed Policy Shift - Real Time Economics - WSJ
40. The Hindu Business Line : Fed out, Govt in again?
41. Fed's Tarullo: Big Banks' Pay Extensive Review To Begin Shortly- Onet.pl - Wiadomo'ci -02.11.2009
42. Dollar Calls the Tune for Stocks, Bonds, Oil - WSJ.com
43. US FED: Tarullo Says Fed's Compensation Guidance Not Formulaic - Forbes.com
44. FT.com / UK - Fed tells banks to adopt pay rules early
45. Fed Official: US Banks `Far From Robust' - WSJ.com
46. US GOVTS: Fed Official Says Fed Focused on CRE Loan Exposure - Forbes.com
47. Treasury Prices Down On ISM Data, Off Session Lows Before FOMC - WSJ.com
48. Treasurys Prices Slump On State Debt Issuance - WSJ.com

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