Fed gives green light to 15 banks, improved take on economy

McClatchy NewspapersMarch 13, 2012 

WASHINGTON — Hours after upgrading its view of the economy Tuesday, the Federal Reserve announced that 15 of the 19 largest U.S. banks had passed tough stress tests that showed they'd be able to weather another catastrophic economic slump.

The Fed was expected to release the results Thursday but instead issued the report about a half hour after markets closed up sharply Tuesday. While the market was still open, JPMorgan Chase, the nation's biggest bank, had announced that it was going to pay dividends to investors.

That was a signal it had been told that it had passed the stress test, designed to gauge whether bank holding companies regulated by the Fed had capital buffers large enough to survive a steep economic downturn and 13 percent unemployment.

News that JPMorgan Chase would raise its dividend by a nickel and buy back up to $12 billion of its stock helped lift financial markets. The Dow Jones industrial average was up 217.97 points to close at 13,177.68. The S&P 500 finished up 24.86 points to 1395.95 and the NASDAQ gained 56.22 points to end at 3039.88

Four banks were deemed to lack sufficient capital to meet minimum requirements in a hypothetical deep downturn. Citigroup Inc. and SunTrust Banks Inc. were the two traditional banks that failed to make the grade. The weakest, other two bank holding companies that must raise more capital were MetLife Inc., the nation's largest life insurer, and Ally Financial, formerly known as GMAC.

"Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty," the Fed said in a statement announcing the test results.

The news followed a statement earlier in the afternoon from the rate-setting Federal Open Market Committee, which virtually repeated January's statement but offered a better read on the jobs front.

Financial analysts had hoped for direction from the Fed on whether it would take any more steps to stimulate an economy that's sluggish by historical standards, but they got none. Instead, the rate-setting Federal Open Market Committee concluded its meeting with a statement virtually unchanged from its last one, issued Jan. 25.

The Fed repeated that it intended to keep the federal funds rate — which banks charge each other for overnight lending — within the range of zero to 0.25 percent. This means the prime rate — which banks charge their best customers — is expected to remain at 3.25 percent.

The Fed also repeated that it's sticking to a program, announced last September, that extends the maturity of its bond purchases in a bid to hold down long-term lending rates. This is designed to keep mortgage interest rates and rates for car loans low in hopes of spurring home sales and auto purchases.

Where Tuesday's statement differed from January's, however, was in its view of the economy's performance.

"Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further," the statement said, sounding a more optimistic tone than January's "some further improvement in overall labor market conditions."

But as in January, Fed governors warned that the housing sector remains depressed and that rising crude-oil and gasoline prices continue to push up inflation in the short run. They didn't expect energy prices to create inflation over the medium run, however. The Fed repeated that it didn't expect to begin raising interest rates until late 2014 at the earliest, an indicator that a long climb back remains ahead for the U.S. economy.

Tuesday's Fed statement amounted to a wash: It gave no sign that the economy is weak enough to need additional support, nor strong enough to accelerate the withdrawal of support.

"There was a subtle acknowledgement of a little bit better tone to the data," said Josh Feinman, the chief global economist for DB Advisors, the asset management business for Germany's giant Deutsche Bank

The next meeting of the FOMC involves an update to the Fed's economic forecast, so Fed governors are likely to express their views more clearly then in their forecast and statement.

Still, the Fed's acknowledgement of an improving labor market comes days after Friday's monthly jobs report for February from the Bureau of Labor Statistics. Although the unemployment rate stopped falling and held steady for the first time in six months, employers added 233,000 jobs last month. And the agency revised its January payroll number upward to 285,000 new non-farm jobs.

The positive jobs report was just one of a number of improving data points. Another came Tuesday, when the Commerce Department reported that February retail sales posted their largest gain in five months. Retail sales grew by 1.1 percent for the month. Commerce said, revising January's retail sales numbers upward, too.

"The gain in retail sales in February, the upwards revisions to spending in December and January, and the strength of auto sales reported by manufacturers for February paint a much stronger picture for the consumer than the demand-side data a month ago were suggesting," said a research note from forecaster RDQ Economics in New York.

In an economic move that could spark tit-for-tat actions, President Barack Obama announced Tuesday that the United States, Japan and the European Union had lodged an unfair trade complaint lodged against China. In a statement before the cameras, Obama said China wasn't allowing access to rare earth minerals needed to make advanced batteries such as the kind that power hybrid vehicles.

"Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing," the president said in a no-questions statement that echoed re-election campaign themes.

China's Ministry of Commerce disputed the U.S.-led complaint, noting it had "emphasized repeatedly that the policy aims to protect resources and the environment, and realize sustainable development," according to a statement carried by the official Chinese news agency Xinhua.

ON THE WEB

Stress test results

Fed statement

Retail sales numbers

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