There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon.

Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term overnight lending rate that banks use. However, this new wrinkle may prevent longer-term rates from rising, even if they were prone to do so. Again, this is good news for homeowners, though bad news for those trying to get better rates from longer-term bonds like pension funds.

Interest Rates Rising Soon is Myth

Third, the vote to keep interest rates low was 9 to 1, but it’s not what you think. The 1 vote against was not to raise interest rates, but rather a vote against current Fed action being insufficient. In other words, not only has the Fed committed to continuing ultra-low short-term interest rates, it is doing so unanimously with one member wanting low rates and then some. This is important because it shows that there is absolutely no reason to expect interest rates to rise anytime soon.

Fourth, while the Fed is very concerned about the U.S. economy and its lackluster growth, it did note that the economy IS actually growing. This is good news on several levels. It means that things are moving in the right direction, assuming that neither Europe, nor Washington, screws it up. It also means that the Fed is not going to kill off a weak economy by trying to thump it’s “inflation hawk” credentials.

Finally, although the Fed is leaving rates low and pledging to do so for an extended period of time, there is has been absolutely no talk of another round of Federal Reserve led stimulus for the U.S. economy. A third round of quantitative easing, or QE3, is not in the cards for the near future. I guess we don’t have to worry about Rick Perry indicting Federal Reserve Chairmen Ben Bernanke for treason before the U.S. elections.

What Fed News Means for You

What today’s news means for you is that if you are currently doing well enough, there is no reason to think that things will change. If you have been hunkering down, so to speak, fearing the worst, it is probably time to lower your guard a bit.

If you have been narrowly skating by in this long and lingering recession, then things are starting to look up. It looks like the economy is growing, albeit slowly, and that means things like lending, financing, and other money based systems should be getting better over the next year.

The two dark spots in all of this are housing and the job market. The amount of economic growth being seen is not enough to begin generating anywhere near the number of jobs needed to make up for millions of out of work Americans who lost their jobs. However, it does look less likely that solid companies will be dragged far enough down that they must lighten payrolls again.

Housing is still the big concern. Economic growth or no, foreclosure rates are still very high and lots of people are underwater on their mortgages. If you are just a bit underwater and want to stay in your home, riding this out is the way to go. If you are way underwater, it is probably time to look at all your options, including drastic measures. You want to be ready to recover when the economy does. Getting hit now makes you one of millions. Taking a hit a year or two after the economy starts to rebound puts you behind.

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Fed Keeping Interest Rates Low originally published at Finance Gourmet

Update: Consumer sentiment also rose. That is a little bit more good news for the economy.

Unfortunately, the news isn’t anywhere good enough to declare an economic recovery. The “good news” about the labor market we have been getting for the last several months means more about the job market bottoming out than it does about it getting better. Essentially, if you were drawing a graph of the U.S. labor market, these last couple of months of good economic news and indicators means you can stop drawing your line down. It does not mean, however, that you can start drawing that line back up.

There are two major stumbling blocks now to an economic recovery. The first is the very unstable situation in Europe. What once looked like a problem for a couple of the continent’s weakest economies now looks like a full-fledged crisis for the entire European Union. Any collapse, or loss of faith, there and the U.S. economy will be pulled back under. The second issue rearing its head is the expiration of current payroll tax cut.

Established a temporary tax cut (aren’t they all?) the current tax cut reduced the amount workers pay for FICA (Social Security taxes) from 6.2 percent to 4.2 percent.

See information about small business FICA taxes.

That tax cut expires on December 31, 2011 and it means that millions of Americans will be surprised in January by lower take home pay just when they start getting their bills for the holiday shopping season. Nothing slams the breaks on a weak economic recovery like consumers that tighten their wallets and avoid spending.

Pretty much every reputable economist out there agrees that eliminating the payroll tax cut will not only reverse the stimulating economic effect it had, but will also act to slow growth, just when it is getting started.

Of course, like everything in Washington these days, extending the tax cut is caught up in partisan bickering by politicians who grow ever more loyal to their parties while caring less and less about what it good for the country and the U.S. economy. Time will tell if the party bosses can wring enough bragging rights from some sort of agreement to get the extension before it is too late. Even one round of smaller paychecks could have a chilling effect on consumer spending.

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Jobless Claims Continue to Fall originally published at Finance Gourmet

The Beige Book is a summary of the current state of the U.S economy across all of the Fed’s districts and for the most part, all reports are of "modest" or even "slight" growth.

Inflation Not Happening

It seems that the highest "street cred" a Fed banker can have is to be an inflation hawk. Since 2008, however, inflation hawks have actually been Chicken Little’s. With the economy growing very slowly and many Americans still out of work, it’s hard to see where inflationary pressure could come from.

The just released Consumer Price Index (CPI) just confirmed that there is no real inflation anywhere to be found in the economy. The index rose just 0.1 percent. Prices excluding food and energy, both traditionally volatile pricing sectors that seem to move of their own accord rather than in step with other prices, actually rose at the slowest rate in six-months, suggesting that retailers have little to no upward pricing power in the months leading up to the holiday season.

In other words, the economy has to get moving again before anyone is going to have luck raising prices and that isn’t going to happen before Christmas. Look for a value priced holiday shopping season, but big discounts might be hard to come by as retailers won’t be reducing prices from higher profitability, growing prices, but rather from low profitability, stable prices.

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Economy Growing Slowly – Inflation Benign originally published at Finance Gourmet

New home sales statistics are quoted on an annual basis. In other words, if April’s new home sales numbers were what the new home sales numbers would be for every month of the year, how many new homes would be sold. So, the 323,000 new homes sold number means that there would be 323,000 new homes sold for the year.

There are two important things about this latest economic data and how it will affect investors and the economy. First, the number is slightly higher than what economists were expecting. Any time a number surprises to the upside, that is good news, because it means that things were actually better than everyone thought. Second, while the number is higher, it is still very weak, meaning that IF the housing market is recovering, it is doing so very meekly.

The big problem for new home sales is that there are so many existing homes for sale on the market today. Foreclosures and distressed owners continue to flood the housing market, and a weak and inconsistent lending environment has even willing buyers unable to buy. Until the lending market gets better, housing won’t get much better, and the economy will be trying to pull an anchor up the hill.

Too bad Congress is too busy playing politics to take action.

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New Home Sales Rise originally published at Finance Gourmet

Recently, the Federal Reserve left interest rates unchanged. Following the announcement, Fed Chairman Ben Bernanke held the first ever Fed press conference in which he laid out the Fed’s view of the U.S. economy. He suggested that the economic recovery is slowing. He didn’t use the word fragile, but plenty of people heard it anyway. He also suggested that inflation was tame and that any uptick was dwarfed by the greater potential for a slowdown in growth.

Jobs Key to Economic Recovery

Business spending has been measured, despite a tiny boom going on in Silicon Valley. Consumer spending has been whacked by not only by widespread job losses, but also by the housing market crash and subsequent collapse of the mortgage industry.

Many homeowners have no equity left in their homes. Those that do are finding that terms for second mortgages are no better than the difficulties faced by many in getting first mortgages. Refinancers aren’t doing any better regardless of credit score and loan payment history.

In other words, the only source of new money for this economy is new jobs. Without them, the recovery is doomed. With them, what is now a fragile economic recovery could slowly bloom into a full-fledged recovery.

The April jobs report is expected to come in with around 200,000 new private sector jobs. If the actual jobs number is close, expect the usual temporary effect from the jobs report, up if better than 200K or lower if less, either way, faded into market memory by the middle of next week.

If, on the other hand, the jobs number comes in substantially lower, expect some serious fallout. Unless analysts choose to write off April as an anomaly, low job creation suggests the economy may not be recovering, slowly or otherwise. That suggestion could trigger the slow unwinding of the current bets on Wall Street that better numbers and better growth is on the way for stocks and earnings. Without that optimism, nothing is holding this market up.

Low job growth, plus Washington budget cutting that slashes jobs at the Federal Government could be the death blow for an economic recovery that has been slow and unsteady thus far.

If investors start worrying too much about that possible future, the market is due for another downturn that could wipe out all the gains for this year and may even start wiping out last year’s stock market rise.

Related posts:

1. Unemployment Report Bad News for 2011 Economy Recovery
2. Sell Banks Stocks or Buy Bank Stocks

April Jobs Report Could Have Big Impact On Stocks originally published at Finance Gourmet

In another change, the Federal Open Market Committee will also release the quarterly growth and inflation estimates that is uses to make its rate decisions today. Usually, the Fed releases those numbers weeks later.

Today’s changes could make for a very volatile day in the markets because no one has ever done things this way before, so no one really knows how they are supposed to react.

• Will the markets over-react to something Fed Chairman Ben Bernanke says?
• Will the markets react less than they would otherwise given how fresh all the data is?
• Or is this all just a bunch of sound and fury signifying nothing?

We’ll all find out later today.

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First Ever Fed Press Conference originally published at Finance Gourmet

A recovery without new jobs isn’t worth the paper it’s statistics are printed on. Ongoing economic recovery requires that not just the people who are currently employed go back to spending and non-fear based economic decisions, but also that more people join their ranks. Unfortunately, that can’t happen if people are not returning to being employed.

Smart money decisions will swing from taking advantage of low prices and low interest rates to saving cash. While increasing savings is good on a personal level, it isn’t necessarily good for the economy overall.

The possibility that jobless benefits will begin to run out for millions of Americans only adds an additional weight to the overall economy. Put it together with States losing billions of dollars worth of Federal money from economic stimulus programs ending in 2011, and you have a lot of negatives pulling on the first quarter of 2011.

The Federal Reserve’s recent announcement to continue providing monetary stimulus is no doubt tied to the expanding scope of economic concerns. Whether the Fed can keep the economy from falling backwards is unknown, but it can blunt the effects of all the negatives lining up against a strong economic recovery next year.

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Unemployment Report Bad News for 2011 Economy Recovery originally published at Finance Gourmet

That is the question a lot of people are asking today as newspapers, news websites, and television news shows lead with a headline that seems to declare that the economy is back to normal. Of course, this is not at all what is going on. This presents another opportunity to take a quick look at how financial facts and financial reporting are not always in sync.

First, the actual event that occurred is that the National Bureau of Economic Research, or NBER, released a statement saying that “a trough in business activity occurred in the U.S. economy in June 2009.” Obviously, this does NOT mean the economy is back to normal, a fact that the NBER statement goes out of its way to highlight.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.

Why is every news outlet in America proclaiming that the recession is over then?

Technically, the recession is over, but that doesn’t necessarily mean what people think it means. Assuming the picture below depicts a hypothetical economic cycle of growth, or expansion, followed by decline, or contraction, the “end” of the first recession occurs at the lowest point of decline, as indicated by the red arrow.

Notice how this in no way implies that the economy has returned to normal. For one thing, there is no such thing as a “normal” economy. Technically, the economy is always growing, contracting, or flat. In other words, the economy is always moving. People like to think that a growing economy is “normal” but there is nothing more normal about growth than there is about a shrinking economy.

Looking at the picture above, no one would dispute that the red arrow points at the time when the economy stopped shrinking and started growing again. This is what it means when the recession is over. However, this DOES NOT mean that the economy has gotten back to where it was. In fact, in the graphic above, the economy goes through two more recessions before growing back to the highest point of expansion from the first economic cycle.

Declaring Recession Over

It is also important to realize that NBER is not a forecasting group. In other words, NBER does not make predictions about whether or not the economy has hit bottom. Instead, NBER looks at historic data and then determines where the bottom of economic contraction occurred. NBER is essentially looking at a graph like this, and pointing out where the lowest point of the trough occurred.

This also does not in any way state that the economy cannot go down from here. Economic expansions can be very short-lived. When a recession ends and a new one begins shortly thereafter, is often referred to a double-dip recession. That may still happen to the U.S. economy, or it may not. Either way, all that anyone is saying today is that there was some upward trend in the economy that started in June 2009. How much or how long that upward movement lasts, is still to be determined.

Finally, remember that this has NOTHING to do with the stock market, the real estate market, or any other financial markets. Economic data is tied to how much stuff the country is making, how much money the country is spending, and how many people are working. It is not about how well the stock market is doing or if stocks are going to make money again.

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Is The Recession Really Over – Recession Ended in June 2009 News Reports Say originally published at Finance Gourmet

Unfortunately, as is always the case when it comes to finance and the economy, the answer is complicated. The most important thing to notice is that the first half of 2010 includes January through March of 2010 which are the months of this year that came before the stock market started recovering. Those months also came before the some lending started loosening back up. They also came before job numbers started going up suggesting that more people will not need to file for bankruptcy if they can make their loan payments with the salary from their new job.

However, it would be foolish to dismiss the news of increasing bankruptcy filings as a non-event. It is just as important to note that the 14 percent increase in filings being reported is as compared to the first half of 2009 when bankruptcy filings were not exactly at all time lows. In fact, the first half of 2009 was very bad for bankruptcy filings already. To actually increase over that number, things in the economy had to be really bad.

What does high bankruptcy filings mean for the economy overall, and does this signal a stock market downturn or a coming recession or even depression?

Bankruptcies Get Worse Economic Outlook for 2010 Gets Clearer

The bad news, of course, is that if people are filing for bankruptcy that means that financial institutions will suffer losses due to those bankruptcies. Furthermore, plenty of the bankruptcies from “irresponsible” borrowers who were clearly overextended in order to buy real estate – remember how “fix and flip” was the easy way to get rich just a few years ago – and those who just overspent and never had any real chance of paying back their loans without selling their house to get the equity, already filed for bankruptcy months ago. That means that these bankruptcies are the “hard” ones, the bankruptcies that come from people who have lost their jobs being out of work for so long that they had choice and no other way to make it work.

Now, for the good news.

Americans in general have far too much debt and far too little savings. This so-called savings deficit is a big problem. Furthermore, for many Americans who have been jobless for too long, there is almost no way they could get out of the hole they are in even if they got a new job paying what they used to make tomorrow. Finally, the U.S. real estate market has bottomed out or is only declining slowly in all but the most overheated real estate bubble markets.

Doesn’t sound like good news does it?

Here is where the good news for the economy is.

As has been widely reported, banks and financial institutions took government stimulus dollars and bailout money to shore up their own balance sheets and did very little additional lending. That means that a majority of debts being wiped out by bankrupt borrowers are old loans instead of new ones. That means that a lot of these debts have already been written off or assigned very low values on the bank’s balance sheets. In other words, this isn’t going to make things any worse for them than it already was.

With that being the case, at least for the short term, there is little concern for the banking sector as bankruptcies rise, so long as they come to an end soon. This is where the good news comes from.

As bankruptcy filings accelerate, they clear out the pipeline of possible bankruptcy filers that might otherwise come later. Banks will find that the profits they managed to squeeze out earlier this year are gone, however, when they come back, there will be much less potential danger overhanging them.

On the other side of each bankruptcy filing is a person or family that no longer has to pay off debts that had grown so unmanageable that they could have choked off 100% of discretionary spending from that family for years. In the aggregate, this would be much worse news for the economy than high bankruptcy numbers now. While bankruptcy is a huge blow it is a one time event from which recovery, albeit a slow one, begins immediately.

Many bankruptcy filers are baby boomers approaching retirement. These people have gotten the very pleasant surprise that, in most cases, retirement accounts such as IRA accounts and 401k accounts cannot be touched in bankruptcy. These same borrowers will also find out that as long as they make their mortgage payments, they are also very unlikely to lose their home during bankruptcy, because a certain percentage of equity is considered untouchable by creditors, as well. Having borrowed against this equity earlier, and with home values dropping, many filers will find themselves well under the equity limit.

Add it all up, and you have a large collection of people who will actually find themselves in a pretty decent position as the economy turns around. Those without jobs will find employment again, and those with them will find their paychecks much easier to stretch to make ends meet without all of those credit card payments. In other words, it will take a lot less economic improvement to put these households back to “normal.”

In short, higher bankruptcies and accelerating filings will cause pain in the short-term, but may be just what the doctor ordered for the economy for next year and beyond.

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Economy Outlook 2010 – Bankruptcy Filings Increase First Half of 2010 originally published at Finance Gourmet