Fed official warns of higher interest bill for Uncle Sam

NEW YORK (CNNMoney) -- The Federal Reserve takes a lot of heat from critics for keeping interest rates low. But there's an upside that most people overlook: Low interest rates save the government money.

Speaking at a conference on monetary policy Friday, New York Fed President William Dudley stressed how lower rates reduce the interest that the federal government pays on the national debt.

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In addition, the Fed's policies have also led to larger payoffs for the U.S. government. By making huge asset purchases over the last couple of years in order to keep rates down, the Fed is also earning interest on those investments. That money gets returned to the Treasury. Last year, the Fed sent about $77 billion to the Treasury, more than double what it was earning before the financial crisis.

"The interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the Federal Reserve to the Treasury," Dudley said at the U.S. Monetary Policy Forum presented by the University of Chicago Booth School of Business on Friday.

The event is essentially a meeting of minds between Federal Reserve officials, members of foreign central banks and economists from some of the world's largest banks and top universities.

Dudley pointed out that the Fed determines monetary policy based on economic activity -- not the government's debt bill.
Why the Federal Reserve can't fix housing

That said, it would behoove fiscal policymakers (meaning Congress and the president) to think ahead to rosier days, when eventually, tighter monetary policy will raise the government's interest bill.

That's exactly why lawmakers need to come up with a credible plan for the nation's debt now, he said.

"The United States faces substantial fiscal challenges in the years ahead," Dudley said in prepared remarks. "In one important respect -- net interest expense -- these challenges may be more daunting that fully appreciated currently."

Dudley also recommended the U.S. focus on increasing exports -- one of Obama's chief goals -- as a means of rebalancing its trade gap. When imports grow faster than exports, it subtracts from economic growth.

He also urged countries that have large trade surpluses -- like China -- to "reorient their economies over time toward increasing domestic demand." To top of page
First Published: February 24, 2012: 2:30 PM ET

New York Fed President William Dudley

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Jobless Claims in U.S. Fall to Four-Year Low

Job seekers at a federal government job fair at the National Building Museum in Washington. Photographer: Xinhua/ZUMApress.com

Claims for jobless benefits unexpectedly dropped last week to the lowest level in four years, showing the U.S. job market is on the mend.

Applications (INJCJC) for unemployment insurance payments decreased 13,000 in the week ended Feb. 11 to 348,000, less than the lowest forecast of economists surveyed by Bloomberg News and the fewest since March 2008, Labor Department figures showed today. The median survey estimate projected an increase to 365,000.

The slowdown in dismissals coincides with a pickup in hiring and a drop in unemployment that’s helping repair a labor market still recovering from the 18-month recession that ended in June 2009. More job gains are needed to boost household spending, the biggest part of the world’s largest economy.

“It’s clearly reflecting a rapidly improving labor market, signaling further declines in the jobless rate,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “It’s good news for consumers, meaning stronger income growth and likely rising confidence that will support spending.”

Estimates for first-time claims ranged from 350,000 to 380,000 in the Bloomberg survey of 45 economists. The Labor Department revised the prior week’s reading up to 361,000 from an initially reported 358,000.

Wholesale prices rose less than forecast in January as food and energy costs dropped, a sign inflation pressures may remain subdued, another report from the Labor Department showed today.
Wholesale Prices

The producer price index rose 0.1 percent following a 0.1 percent decrease the prior month. Economists projected a 0.4 percent gain, according to the survey median. The core measure excluding volatile food and energy rose 0.4 percent, more than projected, led by a surge in drug prices.

The number of people continuing to collect jobless benefits dropped by 100,000 in the week ended Feb. 4 to 3.43 million, the fewest since August 2008. The continuing claims figure does not include the number of workers receiving extended benefits under federal programs.

Builders broke ground on more homes than forecast in January, helped by warmer weather and adding to signs the residential real-estate market is stabilizing, data from the Commerce Department also showed today.
More Starts

Starts rose 1.5 percent to a 699,000 annual rate from December’s 689,000 pace that was stronger than previously reported. The median estimate in a Bloomberg survey called for a rise to 675,000. Building permits, a proxy for future construction, also climbed.

Stock-index futures trimmed earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in March fell 0.1 percent to 1,340.3 at 8:47 a.m. in New York as euro area’s leaders remained divided over a bailout for Greece and Moody’s Investors Service reviewed global banks.

Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 22,800 to 3.48 million in the week ended Jan. 28.

The unemployment rate among people eligible for benefits fell to 2.7 percent in the week ended Feb. 4 from 2.8 percent, today’s report showed. Forty-four states and territories reported a decrease in claims, while nine showed an increase.

The figures follow a report earlier this month that showed improvement in the labor market. Employers added 243,000 jobs in January, the most since April, and the unemployment rate dropped to a three-year low of 8.3 percent, according to the Labor Department.
Firing, Hiring

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

The drop in joblessness over the last few months stems in part from fewer workers in the labor force, according to some Federal Reserve officials.

“A few participants noted that the recent decline in the unemployment rate reflected declining labor force participation in large part, and judged that the decline in the participation rate was likely to be reversed, at least to some extent, as the recovery continues and labor demand picks up,” according to minutes of the Federal Open Market Committee meeting Jan. 24-25 released yesterday in Washington.

Increased demand is prompting some firms to boost their payrolls. “Employee levels rose 5 percent as we continue to hire trainees to handle our 2012 forecasted volumes,” James Squires, chief financial officer for Norfolk Southern Corp. (NSC), the second-biggest railroad company in the eastern U.S., said on a Feb. 14 conference call.

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Robert Willis in Washington at bwillis@bloomberg.net

Eriksen keeps feet on ground

Ajax attacking midfielder Christian Eriksen has revealed he wants to test himself at one of Europe's bigger clubs - but he is in no rush to quit the Eredivisie.

GettyImagesChristian Eriksen: Happy in Holland

Eriksen, who turned 20 on Tuesday, has been tracked by Premier League clubs ever since he played a starring role in Denmark's 2-1 defeat to England in an international friendly 12 months ago. But while the former Odense player knows he is being watched by other sides, he believes he will learn more at Ajax.

"I always thought it would be better to go to Holland first, especially because of the position I play and the football I wanted to play," Eriksen told the Daily Mail ahead of Ajax's Europea League tie at home to Manchester United. "Ajax have a tradition of good football and play 4-3-3, which suits me. They also spend lots of money on youth players with the aim of putting them in the first team.

"Top sides in England have to get into the Champions League every year, so they are not going to buy a 17-year-old and put him straight in the first team. They buy players who can play now. You might not get a game until you are 21, so why should you go there?

"I work a lot with Frank de Boer (the head coach) and Dennis Bergkamp (his assistant). I've seen a lot of clips of Bergkamp playing for Arsenal on YouTube. In the beginning it was a shock seeing these big names, even though most of them played before my time. My dad couldn't believe it. Everywhere he turned was an idol.

"When it's time to leave Ajax, I'll try to go to a bigger team who do well in the Champions League every year and win trophies, but I'd make sure it was somewhere where I wouldn't just sit on the bench. Right now, my mind is only focused on Ajax."

Ajax boss De Boer thinks Eriksen could stay at the club for another five years before moving on.

"Christian is a smart kid," he said. "Of course maybe he will play for a big team like Manchester United in the future, but I think he wants to show what he is capable of in this kind of team.

"It would be better for him to stay until he was 25 because you learn a lot in the Netherlands. If you leave afterwards you are a more stable player and ready to play in the big leagues."

Euro: So When is the Second Greek Bailout Vote Happening?

Dollar Wins Critical Break Only to be Knocked Back in Greek Churn

The dollar looks as if it is manic-depressive. Through the first half of the US session the currency forged significant gains against most of its most liquid counterparts (European and high-risk currencies alike). Yet, by the end of the New York session heading into Asian trading hours, the greenback retreated sharply. The indecisiveness is the work of underlying risk trends which are taking a greater interest in what happens with the Euro Zone’s financial crisis (Greece). Where the Euro and S&P 500 head, expect the dollar to be moving in the opposite direction.

Euro: So When is the Second Greek Bailout Vote Happening?

The fundamental compass on the euro has gone haywire and we have paid for it in volatility. The shared currency suffered multiple reversals over the past 24 hours as the read on the region’s financial crisis improved, deteriorated and improved again. We were heading into Tuesday’s trading session equipped with the knowledge that the Greek Parliament had approved what it believed were the necessary requirements from the EU to secure the second bailout package. That relief didn’t last long, however, as the region’s ministers determined ‘not all the paperwork was done’ and therefore, the meeting would be postponed until next week. It non-political speak, this translates into: ‘we haven’t heard a unanimous agreement from Greece’s political leadership to stay the course after they win the €130 billion package.’ The impact on the euro and general risk trends was clear and severe (relative to recent trading conditions). That wasn’t the final word as unnamed Greek officials said conservative party leader Samaras (most likely the next Prime Minister) would sign a letter of commitment and the PBoC vowed support. Yet, there has been nothing to suggest Wednesday’s originally-scheduled meeting would be back on. Yet another monkey wrench in a mechanism that has been harangued by problems. How long does the market tolerate this spectacle is a real concern. In the meantime, we’ll see how euro sentiment settles in the upcoming session and see if the big-ticket Euro Zone, German, French and Italian 4Q GDP figures add to the equation.

British Pound Traders Ready to React to Labor Data, BoE Inflation Report

If there was any doubt as to the sterling’s connection to the euro’s bearing, the 20-day rolling correlation between EURUSD and GBPUSD is currently 0.84 (1.00 being perfect and 0.00 representing complete randomness). On a shorter time frame, the connection is even stronger (the 5-day or one-week link is a remarkable 0.96). As such, those looking for the pound’s trend should keep a close eye on how the Euro-area financial situation progresses. That said, there is plenty of room for short-term divergence in the form of scheduled event risk. We’d reserve expectations of separation from dominant theme only through meaningful developments, but the upcoming docket fulfills that requirement. With the focus still firmly fixed on the balance between economic activity and austerity in the UK, we come upon the jobless claims figures and BoE Inflation Report. What should we look for? A strong employment figure and outlook for more stimulus would fit nicely with the current ‘risk-on’ theme.

Japanese Yen Mixes BoJ Stimulus and Risk Appetite for Effective Decline

I had set my expectations for a reaction from the Japanese yen to the Bank of Japan’s policy decision yesterday low – perhaps too low. In the aftermath of the central bank’s changes, the USDJPY surged another 100-plus points while other yen-based crosses carved out rallies of their own. Where is this strength coming from? In the policy decision itself, the ¥10 trillion increase in the asset purchasing program to ¥30 trillion total represents a significant bid for the region. Yet, does it really differ that much from the previous steps taken at previous meetings? Alternatively, setting an inflation goal of 1 percent merely offers a target without means to reach it. Plenty of people have speculated that this is a sign of ‘stealth intervention’ which presents a temptingly simple explanation. Yet, there is perhaps a more reasonable explanation: risk appetite trends. Though both the dollar and yen are safe haven currencies, USDJPY has shown positive risk correlations when major themes are stable.

Australian Dollar Finds Asian Session Strength as PBoC Talks EU Crisis

Consumer Confidence survey figures for February posted an unexpectedly strong 4.2 percent increase through the Westpac’s index. This would have matched the previous reading’s five-year high had it not been revised higher. Regardless of this historical performance, the data itself would generate little response from the market. Fundamentally, domestic consumption expectations matter relatively little to a currency that is basing much of its strength on the foreign demand for its raw materials and the inflow of capital seeking yield. Therefore, with an eye on risk appetite trends, we could spot the meaningful correlation between AUDUSD and the S&P 500 futures or the Nikkei 225 future. The session-end rally in risk through the New York market offered a boost, but this run through the Asian session following the PBoC’s open promise to help the EU through its difficulties is proving more fruitful.

New Zealand Dollar Jumps after Retail Sales Figure, Continues with Risk

Where goes risk, so does the New Zealand dollar. As surely as the Aussie currency has taken higher alongside equities in the Asian session; the kiwi will be making a similar advance. That said, the currency received an additional boost from its own scheduled event risk in the form of a 4Q retail sales report that handily bested expectations with a 2.2 percent climb. For consistent influence though, just in case sentiment returns in a meaningful way, we should be aware of the yield that the New Zealand dollar will be working with to whet the appetites of carry traders. The benchmark yield may be 2.50 percent, but the money market rate is running 2.95 percent while the 10-year bond rate is currently 3.98 percent. In fact, when adjusted for 4Q inflation figures, the real rate return (yield minus inflation) on the New Zealand government bond is significantly better at 2.18 percent versus the Australian 0.9 percent equivalent.

Gold: The Only Thing Not Moving on a Tense, Volatile Day

Volatility has notably picked up for the FX and capital markets over the past 12 hours; and yet, gold is still working its way deeper into congestion. As a safe haven asset, it isn’t difficult to generate activity for the metal; yet this is not a freely associated alternative to a currency (the greenback is a preferred FX alternative to something like the Aussie dollar) or equities (bonds or cash have been generally preferable on this front). To rouse gold to life, we need underlying sentiment with drive behind it. In the meantime, we find the average five-day daily range through Tuesday’s close was $16.95 (the lowest since July 18th), the CBOE’s volatility measure for gold is just off seven month lows and futures volume is still exceptionally light. If the dollar maintain a clear trend (bullish or bearish), gold will find greater charge for a counter-run.

Homeownership rates fall to 66% as downturn nears a bottom

Fewer Americans own homes and many of them are continuing to see values decline.

The U.S. Census Bureau reported Tuesday that the nation's homeownership rate fell to 66% in the fourth quarter, continuing a seven-year drop from a fourth-quarter peak of 69.2% in 2004.

At the same time, U.S. home prices fell 1.3% in November from October and were 3.7% below 2010 levels, the Standard & Poor's/Case-Shiller home price index indicates.
STORY: Home prices drop in November for third straight month
Falling homeownership — and prices — reflect the worst housing downturn since the Great Depression. And while there are signs that the housing industry's downturn may at least be nearing a bottom, the impact of the collapse will be evident for years to come, economists say.

As of November, average U.S. home prices were back to mid-2003 levels, S&P says.
"Americans are less keen on homeownership knowing now that prices can fall," says Paul Dales, economist with Capital Economics.

Even if people want to own a home, they may not be able to, given the difficulty in getting financing for a mortgage, Dales says. The National Association of Realtors says many purchase contracts appear to be falling through for that reason.
Many economists expect home prices to continue to fall this year and maybe into next year before stabilizing and then showing little or no appreciation for some time.
"The trend is down, and there are few, if any, signs in the numbers that a turning point is close at hand," says David Blitzer, chairman of S&P's index committee.
Phoenix was the only city in Case-Shiller's 20-city index where home prices rose in November from October. They were up 0.6%.

On a year-over-year basis, only two cities showed rising values. Detroit was up 3.8%, and Washington, D.C., 0.5%, the Case-Shiller data show.

While prices are still falling in most areas, there are signs of increased home sales.

Existing home sales rose in December for the third consecutive month, the National Association of Realtors says. And pending home sales, while dropping more than expected in December, were still above levels a year before, NAR says.
"Home prices will be the last thing that moves up" after increasing sales and shrinking inventories, Blitzer says.
The homeowner vacancy rate fell again in the fourth quarter, the Census data show, to 2.3% from 2.4% in the third quarter and from 2.7% in the fourth quarter last year.
The 2.3% rate is the lowest since early 2006 and "leaves the visible inventory at a level consistent with house prices bottoming out later in the year," Capital Economics says.
The drop in homeownership rates has been most pronounced in the West. As of the fourth quarter, the homeownership rate there stood at 60.1%, the Census data show.
That's down from 64.5% in the fourth quarter of 2006, which is about when home prices began their five-year tumble.

The West is home to three of the states most affected by foreclosures, which have hurt homeownership rates. Nevada, Arizona and California were the top three states last year with the highest foreclosure rates, market researcher RealtyTrac says.
While homeownership drops, more people rent. Almost 34% of occupied homes in the fourth quarter were rented, according to the Census data. That's up slightly from the same quarter a year earlier.

The rental vacancy rate of 9.4% for the quarter was the same as a year ago but down from above 10% rates in the fourth quarters of 2009 and 2008, the Census data show.
Higher rents are expected as more people rent, economist Dales says.

First lady pushes Jay Leno to eat healthy

First lady Michelle Obama cajoled Jay Leno into nibbling on some fruit on the "Tonight Show," breaking his long-held aversion for all-things-healthy in his diet.
Leno once told a magazine he hadn't eaten a vegetable since 1969, and he told the first lady he gave up apples in 1984.
Earlier, Obama poked at him in a Twitter post, hinting she'd "get Jay to eat some veggies."
The first lady urged him to dip it in honey made from beehives in the White House garden: "It will help it go down easier," she assured him.
"White House honey? That sounds bad," Leno told her. "You know, with a different president that could mean a whole different thing, 'a little White House honey.'"
The first lady is on a two-day swing through California where she'll promote her "Let's Move!" campaign promoting fitness and healthy eating for kids, while helping Democrats raise money at two events for the upcoming elections.
She told Leno she's not doing anything special to prepare for what's expected to be a tough re-election campaign for her husband, President Barack Obama.
"You know, there's really no way to mentally prepare for it. You take each day as it comes," she said.
Republican Mitt Romney has been ridiculing the White House and might face the president in November, but the first lady gave the former Massachusetts governor's singing voice a diplomatic endorsement. Romney surprised supporters in Florida with an on-pitch version of "America the Beautiful" on Monday, and Leno asked the first lady for her opinion.
"It's beautiful," she said with a laugh and raised eyebrows. "And it is America's song, and it's a song that's meant to be sung by every American," the first lady said in a taped appearance for the NBC show.
Leno told her, "That is right, regardless of political affiliation."