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Federal Reserve Extends Lending Program
The Federal Reserve is extending its emergency lending programs to Wall Street in light of continued fragile circumstances in financial markets.
The primary dealer credit facility, which was set up after the near collapse of Bear Stearns in March and was set to last until mid-September, has been extended until Jan. 30, 2009.
The program provides discount window loans to primary dealers, collateralized by investment-grade securities. The interest rate charged is the discount rate of the Federal Reserve Bank of New York.
And the term securities lending facility, which has also been extended until the end of January, will allow investment banks to swap riskier investments such as asset-backed or mortgage-backed securities for Treasuries.
The Fed says these steps will “enhance the effectiveness of its existing liquidity facilities.”
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U.S. Salaries, Inflation Expected to Jump
Headline CPI inflation in the United States will hit 6% within the next six months, forcing both salaries to rise and the Federal Reserve Board to raise interest rates by at least 200 basis points, according to a report.
The CIBC World Markets Report notes that the American economy has not seen an inflation rate this high since 1990 and that only lasted four months.
“You’ve got to go back to 1982, in the midst of the stagflation that followed the second OPEC oil shock, to see the last time American inflation was clocked at that kind of pace for any sustained period,” says the brokerage’s chief economist, Jeff Rubin.
Soaring energy prices are once again driving inflation concerns but today’s high prices are emboldening the bargaining positions of many U.S. workers.
“As shipping costs soar with triple digit oil prices, the once omnipotent threat of Chinese competition is growing fainter every day,” he says. “And the same energy costs that now protect American workers with soaring freight costs are at the same time eating away at their pay checks at the gas pumps.”
The result of these factors is the likely return of cost-of-living allowances (COLA) in North American wage negotiations, particularly in highly organized industries like steel, where soaring freight rates are the equivalent of double digit tariff protection.
Rubin notes that high energy prices give American manufacturing workers bargaining power that they have lacked for over a decade while at the same time encouraging them to ask for larger pay raises to keep pace with the soaring price of gasoline.
“Back in the 1980s, most collective bargaining agreements of the day had cost of living allowances built into the wage scale,” he says. “Those COLA clauses largely became self-fulfilling prophesies by ensuring that largely oil price driven inflation would become self-sustaining through a wage-price spiral.”
With changing labour rates building in inflation clauses, Rubin expects that interest rates will also have to rise.
“We expect that the Federal Reserve Board will raise interest rates no less than 200 basis points by the end of next year,” he adds. “History says we will be very lucky if they don’t have to do more.”
To read the report on the CIBC World Markets website, click here.
