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Today’s monetary forecast: Low rates through the summer
Three numbers out today are fodder for fiscal doves to argue that the economy is giving a green light to the Fed to keep buying bonds and pumping money into the economy:
Retail sales: Rose more than forecast in October. Translation: Low borrowing costs and rising home and stock values are juicing the economy. Keep pumping!
Existing home sales: Fell in October to the lowest level in four months as rising interest rates and limited supply crimped the market. Translation: The Fed needs to keep hammering at interest rates, to keep them low so that Americans can afford to buy homes. Keep pumping!
And the kicker, inflation: The Consumer Price Index fell for the first time in six months. Translation: The cost of living is falling, and inflation is still barely moving the needle. Keep pumping!
Add that to Ben Bernanke’s statement last night that the Fed will likely hold down its target interest rate after it stops its quantitative easing program, and possibly after unemployment falls below 6.5 percent, and you have a low interest rate environment that could last until next summer, at least.
Fiduciary duty, new rules for advisers and an explainer
You see those beads of sweat on the brow of your financial adviser? She’s rushing to get you to sign on the dotted line before the SEC creates a uniform fiduciary rule for brokers and advisers.
This could be a very big deal for the personal finance industry, but when I mentioned it to Kai Ryssdal, he said, “Sorry man, you lost me at uniform fiduciary rule.”
So if you’re confused about anything involving the word fiduciary consider yourself in good company. And consider yourself in need of this here explainer video:
So why is it a big deal? Because if the rule is written right, brokers and financial advisers will have to act as a fiduciary, which means they’ll have to act in the client’s best interest. That’s your best interest, not theirs. That means they won’t be allowed to sell you some dodgy mutual fund or insurance product that pays them a fat commission.
Hats off to the Consumer Federation of America, which drafted the proposal. The SEC’s Investor Advisory Committee is expected to vote on it Friday.
Here’s the nub, according to the subcommittee: That any fiduciary duty imposed by the SEC should provide "an enforceable, principles-based obligation to act in the best interest of the customer.”
Fed to banks: Get a bigger rainy-day fund
The Federal Reserve said today that it wants to “strengthen the liquidity positions of large financial institutions.” In everyday language, the Fed wants banks to have a lot more cash on hand than they do right now, in case of an emergency. Like an emergency fund. Or the air bag in a car.
Banks don’t usually have much cash lying around in their vaults, since they prefer to lend it out to people and earn interest on it. The only thing that cash in a vault accumulates is dust. But just like any other business, banks need cash to run their businesses. They need to make payroll, make bond payments, settle lawsuits.
But rather than have cash on hand to do those things, banks prefer to borrow the money … from other banks.
In order for one bank to lend to another, the lending bank has to trust that the borrower bank will be able to pay it back. And if the lender doesn’t trust the borrower, he won’t lend. And that leaves the wanna-be borrower with a liquidity crisis.
Trust can break down between banks for any number of reasons. Maybe the lender bank’s been tipped off that the wannabe borrower has bought too many toxic assets. Or maybe there’s a rumor that a big fund owned by the wannabe borrower is about to go bust.
There may be some truth to this ... or there may be none. But all it takes is the whiff of a problem for the money to dry up. And without money coming in the door, a bank can’t send money out the door. And if it doesn’t send money out the door, the bank goes bust.
The Fed doesn’t want banks to go bust.
So it’s come up with an idea.
Banks will have to estimate how much cash is going to go out the door during a short-term period of stress, and based on that, it will have to hold a certain amount of cash on hand. That will essentially allow a bank to operate on its own, without borrowing from other banks, for a certain period of time.
Does this mean that bank robbers are now feverishly working out plans to tunnel into the Bank of New York from the crypt of Trinity Church? Hardly. By cash, the Fed doesn’t mean bank notes necessarily, it means stuff that can be converted into cash very easily and quickly. Like Treasury debt, commercial paper, shares of blue chip companies and the like.