FDIC Closes Two More Banks

Bank closures appear to be picking up. The Feds closed two banks yesterday:

• First National Bank of Nevada, Reno, NV – Assets of $3.4 billion – Deposits of $3 billion (FDIC info)
• First Heritage Bank, N.A., Newport Beach, CA – Assets of $254 million – Deposits of $233 million (FDIC info)

As you can see from the FDIC list of failed banks, two closures on the same day are rare.

The FDIC press release does have some good news regarding these closures. All insured and uninsured deposits from both banks have been transferred to the acquiring bank:

All depositors, including those with deposits in excess of the FDIC’s insurance limits, will automatically become depositors of Mutual of Omaha Bank for the full amount of their deposits.

Fed Cuts Rates Again

Short-term interest rates will come down again, for the seventh time since September.

The Federal Reserve cut its target for the federal funds rate by a quarter-point, from 2.25 percent to 2 percent. The prime rate will fall by a quarter-point, from 5.25 percent to 5 percent. The move spells good news to people who borrow money on loans, such as home equity lines of credit, that are linked to the prime rate. It’s not such good news for savers who want to put their money in short-term certificates of deposit.

The rate-setting Federal Open Market Committee has been slashing rates to encourage consumers to borrow, and therefore stimulate the faltering economy. At the beginning of September, the federal funds rate stood at 5.25 percent; since then, the Fed has cut it by 3.25 percentage points. It has been an unusually rapid series of rate reductions, as the Fed has tried to catch up with the economic slowdown brought on by the housing slump.

“Recent information indicates that economic activity remains weak. Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation have risen in recent months. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to moderate growth over time and mitigate risks to economic activity,” according to the Fed announcement.

The Federal Reserve knocked 25 basis points off a key interest rate.

This rate cut had been expected, with futures markets pricing in a 1-in-5 chance that the Fed would keep rates unchanged, and a 4-in-5 chance of a quarter-point cut. To the extent that anyone expected the Fed to keep rates unchanged, that sentiment stemmed from the inflation picture. As anyone who drives to the grocery store knows, prices for gasoline and food have been skyrocketing and threatening to eventually push up prices for everything.

Typically, rate cuts make inflation worse. That makes the case for holding short-term rates steady. But this isn’t a typical situation. Prices aren’t rising because the economy is booming; instead, they are rising despite an economic downturn.

“It’s a compromise between two equally persuasive arguments,” says Richard DeKaser, chief economist for National City Corp. “On the one hand, there’s an increasingly legitimate argument that inflation needs to be pre-empted more aggressively.” On the other hand, he says, “there is still risk to the economy in terms of weaker growth.”

Fed Cut Rates Again; Sees An End

The Federal Reserve lowered a key U.S. interest rate by a modest quarter percentage point on Wednesday and hinted the move could be the last in a series dating to mid-September.

However, it kept its options open and financial markets saw some chance more rate cuts could be in store.

In announcing its decision, the U.S. central bank pointed to the “substantial” reductions it has already put in place and noted that energy and other commodity prices were on the rise. It also dropped a reference contained in its last interest-rate announcement that “downside risks to growth remain.”

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity,” the central bank said.

While the Fed said uncertainty on the outlook for prices remained high, it also said it still believed inflation would moderate over time, which some analysts saw as suggesting the possibility rates could move lower. Two Fed officials dissented from the decision to cut rates, preferring no change.

Mortage Rates Increase

Mortgage rates went up this week, coinciding with a rally in stock prices.

The benchmark 30-year fixed-rate mortgage rose 17 basis points to 6.12 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.25 percent; four weeks ago, it was 6.32 percent.

The benchmark 15-year fixed-rate mortgage also rose 17 basis points to 5.7 percent. The benchmark 5/1 adjustable-rate mortgage fell 12 basis points to 6.04 percent. The 30-year jumbo rose 15 basis points to 7.52 percent.

Fed Bank Changing It’s Role?

In the past two weeks, the Federal Reserve, long the guardian of the nation’s banks, has redefined its role to also become protector and overseer of Wall Street.

With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.

Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.

Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.

“This will redefine the Fed’s role,” said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. “We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they’ve recreated the financial universe.”

Fed Cut Rates to 2.25%

The central bank’s rate-setting Federal Open Market Committee cut the target for the federal funds rate by three-quarters of a percentage point, to 2.25 percent.

The prime rate will fall three-quarters of a percentage point, also, to 5.25 percent. Variable-rate credit cards and home equity lines of credit are pegged to the prime rate, so they will drop, too. The goal is to encourage consumers to borrow and spend more to revive the economy.

A cut of a full percentage point had been widely expected, but the Fed apparently believed that would be too inflationary: “Inflation has been elevated, and some indicators of inflation expectations have risen,” the central bank said in its policy statement. “The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased.”

But will consumers borrow and spend more in response to lower rates on credit cards and credit lines? Maybe — but probably later rather than sooner.

“In the short term, I’m not sure it will have much of an impact at all,” says Jim Baird, chief investment strategist for Plante Moran Financial Advisors in Kalamazoo, Mich. “Clearly, when you look at consumer sentiment, there’s a lot of concern about the economy, housing and certainly the stock market. Consumers are very hesitant to stick their necks out very far.”

Yet Another Fed Interest Rate Cut

The central bank’s rate-setting Federal Open Market Committee cut the target for the federal funds rate by three-quarters of a percentage point, to 2.25 percent.

The prime rate will fall three-quarters of a percentage point, also, to 5.25 percent. Variable-rate credit cards and home equity lines of credit are pegged to the prime rate, so they will drop, too. The goal is to encourage consumers to borrow and spend more to revive the economy.

A cut of a full percentage point had been widely expected, but the Fed apparently believed that would be too inflationary: “Inflation has been elevated, and some indicators of inflation expectations have risen,” the central bank said in its policy statement. “The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased.”

But will consumers borrow and spend more in response to lower rates on credit cards and credit lines? Maybe — but probably later rather than sooner.

“In the short term, I’m not sure it will have much of an impact at all,” says Jim Baird, chief investment strategist for Plante Moran Financial Advisors in Kalamazoo, Mich. “Clearly, when you look at consumer sentiment, there’s a lot of concern about the economy, housing and certainly the stock market. Consumers are very hesitant to stick their necks out very far.”