Fed Funds Implied Probability

Ben Bernanke says US Monetary Policy is ‘well positioned’; Wachovia fell for second day after ousting CEO Kennedy Thompson; Analysis by Mark Howard, Barclays Capital Head of Credit Analysis.

President Bollinger, Dean Hubbard, Co-Chairman Kravis, and distinguished guests, I am very pleased to be here and especially honored to receive the Columbia Business School’s Distinguished Leadership in Government Award. This evening I would like to offer a few thoughts on mortgage markets and the recent increase in the pace of delinquencies and foreclosures. My particular focus will be on geographic variation in mortgage performance and how that variation can help us better understand and prevent foreclosures. I will also discuss some initiatives taken by the Federal Reserve to address the foreclosure crisis as well as other policies that might be used to strengthen mortgage and housing markets.

Geographic Variation in Loan Mortgage Performance

As my listeners know, conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply. The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates: About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008. Not all foreclosure starts result in the borrower’s loss of the home; sometimes the borrower is able to make up the missed payments or other arrangements are made with the lender. Given the number of borrowers in distress and the weakness of the general housing market, the share of foreclosure initiations that ultimately result in the loss of the home seems likely to be higher in the current episode than customarily has been the case.

With Recession Fears, Feds Cut Interest Rate

The Federal Reserve cuts a key interest rate by three quarters of a percentage point, hoping to stem fears of a recession in the United States. This is the biggest one day move by the central bank in recent memory.

Federal Reserve to Propose New Curbs to Target Subprime Mortgages. Further Analysis and Discussion with David Wyss of S&P

Federal Reserve staff recommended that policy makers issue new restrictions on subprime mortgages, from a ban on low documentation loans to limiting penalties for borrowers who prepay their debts.

The new proposal, which the Board of Governors will vote on later today, follows months of public comment by Congress and consumer advocates, who urged the Federal Reserve to toughen consumer protections.

Finance industry officials warned that a crackdown would curtail lending in the midst of the housing recession. “Mortgage-market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded”, Fed Chairman Ben Bernanke said in a statement.

The proposed new rules “were carefully crafted” to deter “improper lending” without “unduly restricting mortgage credit availability”, he said.

The proposed changes are the product of Central Bankings biggest regulatory initiative since Bernanke took office in February 2006.

The Fed chief is aiming to preserve the Fed’s consumer protection role after Democratic lawmakers blamed it for lax oversight and introduced legislation to set rules for mortgage lenders. The Fed proposed tightening restrictions on so called pre-payment penalties, requiring the escrow of taxes and insurance, and banning loans made without verification of income or assets.

Lenders would be responsible for determining whether their customers can afford a loan after the initial interest rate resets.

Awaiting Central Bank Auctions And November Housing Numbers. Markets will look to Central Bank cash auctions on Monday to gauge demand for central bank funds. Investors will decide whether central banks’ liquidity-boosting measures bring down money market rates as desired.

Optimism over central banking fades. The day after central banks banded together to boost liquidity in money markets, the feeling is that it is not enough. Plus:# SachsenLB bailed out again # French banks plan ’super conduit’ fund

Fed announces liquidity moves. Just one day after cutting rates by a quarter of a point, the U.S. Federal Reserve makes an unexpected move. The U.S. Federal Reserve announced the creation of a temporary short term lending facility to ease credit market strain.

The US Central Bank cut interest rates again in order to bolster the housing market and US economy. In its final meeting of 2007, the Federal Reserve cut interest rates for a third straight time. But Wall Street is saying “It’s just not enough”.

Federal Reserve’s Cuts Disappoint Wall Street Once Again. A big decline on Wall Street as the Fed cuts interest rates again, but less than some had expected.

# The Dow declined 294 to 13,432.
# The S&P 500 slid 38.
# The Nasdaq lost 66.

This paper reviews the progress that the science of monetary policy has made over recent decades. This progress has significantly expanded the degree to which the practice of monetary policy reflects the application of a core set of “scientific” principles. However, there remains, and will likely always remain, elements of art in the conduct of monetary policy. Here is what the Fed has to say about that: click here