Bankers Advising Fed Said Accommodation May Last Three Years

Bankers Advising Fed Said Accommodation Could Last to 2016
“Interest rate increases could damage the current momentum” in housing, which is “slowly recovering” amid a rebound in prices related to low inventories, the Federal Advisory Council said. Photographer: Andrew Harrer/Bloomberg

Bankers advising the Federal Reserve this month said they expect the central bank’s record accommodation to last as long as three years, while warning that an interest-rate increase could slow the housing recovery.

The Federal Advisory Council said “it is likely that current policy accommodation will continue for one to three years,” given current economic forecasts, fiscal policy restraint and subdued inflation, according to minutes of its May 17 meeting released today in Washington.

“Interest rate increases could damage the current momentum” in housing, which is “slowly recovering” amid a rebound in prices related to low inventories, the bankers said. While low interest rates have made home ownership more attractive to some, the panel warned record Fed stimulus may now be “perceived as integral” to the housing finance system.

Rising demand pushed up the S&P/Case-Shiller index of property values in 20 cities by 10.9 percent in the year through March, the biggest 12-month gain since April 2006. The housing rebound is spurring the expansion and boosting consumer sentiment. The Conference Board’s consumer-confidence index climbed to the highest level in more than five years in May, data from the New York-based private research group showed.

The Fed said on its website today minutes of the council will be posted online about two weeks after each gathering. The central bank earlier this month released the records of meetings from 2011 to 2013 for the first time in response to a Freedom of Information Act request from Bloomberg News.

Advisory Council

The advisory council includes Joseph Hooley, chairman and chief executive officer of State Street Corp. in Boston; James Gorman, chairman and CEO of Morgan Stanley in New York; Kelly King, chairman and CEO of BB&T Corp. in Winston-Salem, North Carolina; and D. Bryan Jordan, chairman and CEO of First Horizon National Corp. in Memphis, according to the Fed’s website.

While the record of this month’s meeting didn’t define accommodation, the Fed has kept its target interest rate near zero since December 2008 and pledged to hold it there until the unemployment rate, currently 7.5 percent, falls to 6.5 percent. Policy makers also engaged in three rounds of bond purchases, known as quantitative easing, driving the central bank’s balance sheet to $3.39 trillion as of May 29.

FOMC Gathering

The Fed on June 5 is scheduled to release its Beige Book report on current economic conditions in each district and sector. The next meeting of the policy-setting Federal Open Market Committee is set for June 18-19 in Washington and will include a press conference by Chairman Ben S. Bernanke and an updated Summary of Economic Projections from Fed officials.

The Standard & Poor’s 500 Index headed for its second weekly decline after rising to a record close on May 21. The benchmark for U.S. stocks declined 1.4 percent to 1,630.74 in New York, while the yield on the 10-year Treasury note rose 0.02 percentage point to 2.13 percent.

The panel said the biggest lenders are tightening mortgage standards and increasing the credit scores and documentation required for loans, according to the minutes. Fannie Mae and Freddie Mac aren’t moving quickly enough to foreclose on delinquent loans, they said.

“One member expresses concern that Fannie Mae, Freddie Mac, and others continue to hold a significant number of underperforming loans and are not taking foreclosure actions,” according to the minutes. “This is skewing the positive market-condition data and creating a potential future challenge.”

Budget Cuts

Automatic U.S budget cuts, part of a process known as sequestration, aren’t harming the economy so far, the panel said. The impact of the reductions, which will slice the federal budget as much as $1.2 trillion over nine years, are difficult to assess as just 3 percent of businesses reported a direct effect, the panel said.

“There was nearly unanimous consensus that the sequestration has had little direct business impact so far,” according to the minutes. “With the specific exception of the Washington D.C. metro area, no member indicated material measurable impact from the sequester.”

The panel also cited potential harmful effects of the Affordable Care Act, the law which expands health coverage to about 27 million uninsured people through a series of state-run health exchanges where residents would purchase subsidized insurance plans and through an expansion of Medicaid programs.

“Almost every member bank still highlighted significant concern over the implementation of the impending health care legislation and its potential material impact on business confidence,” according to the meeting minutes.

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