Federal Reserve Update

The Federal Reserve's beige book report, a detailed analysis of the economy from the regional Federal Reserve districts, has been released this week. The compilation of economic data indicates that some regional economies in the United States are showing signs of weakness. Two districts have reported that economic activity has "held steady", while another two districts have reported that their economic activity is slowing. This contrasts with the last beige book report released by the Fed in June, which reported economic growth in all twelve districts was increasing. The beige book analysis is important because it can help economists measure how broad-based economic growth is in United States and will help guide the Fed at their next meeting, which is set for August 10th.

The Federal Reserve board members may have a gloomier outlook for the US economy this summer than they did in the spring. The released minutes from the last meeting of the FOMC members on June 22 -23 show that expectations for both economic growth and price inflation have been revised downward for the remainder of this year and 2011. The Fed has downwardly revised GDP growth to between 3% and 3.5% for the year and revised their anticipated inflation rate to between 1% and 1.1%. In the Fed's majority estimation the threat of recession in the US economy now outweighs the threat of inflation. Ten Federal Reserve banks voted to keep the federal funds rate unchanged, while Fed banks in Dallas and Kansas City dissented and voted to increase the discount rate a quarter point to 1%. The Federal Reserve still has a few options left if the economy were to worsen and contract again. Fed policy options include:

• Open market purchases of mortgages securities and Treasury bonds
• Revising the language in the Fed's official statement to extend the period of time interest rates are anticipated to be low
• Increasing the money supply
• Supporting government stimulus packages

The target range for the federal funds rate was kept at 0% to 0.25% by the FOMC at last month's meeting of Fed decision makers. The forecast for the rest of 2010 does not call for significant increase in interest rates. As a consequence, rates on bank deposit accounts including high interest savings accounts and certificates of deposit, are unlikely to increase before the Fed moves to raise their benchmark interest rates. Money market rates and checking account rates, in particular, are directly impacted by the Fed's interest rate policy. CD rates and mortgages rates usually track Treasury yields and could increase before the Fed officially moves to raise rates, if corresponding Treasury yields increase.

In other Federal Reserve related developments, the Senate banking committee has proposed letting a council of regulators decide whether banks should be banned from dealing in derivatives in an amendment to the financial regulation bill. The controversial provision, opposed by the Fed and bankers, would give the council two years to study whether banks should be forced to spin off their risky derivatives operations. The U.S. Senate has also voted to require a one-time audit of the Federal Reserve and the Fed's actions during the 2008 financial crisis. Of particular interest to U.S. Senators is providing transparency to the trillions of dollars of emergency loans made by the Fed to financial institutions at zero-interest or low interest during the financial crisis. Support for audits of the Federal Reserve has increased after the Fed's financial regulatory powers have increased. In the face of Congressional discussions, Fed Chairman, Ben Bernanke, remains consistent in his support of the continued independence of the Fed and of the Fed's increased regulatory powers