Across the Curve

Ian Morris of HSBC on the Bernanke Speech

I wrote at length earlier today on the Bernanke speech. Ian Morris at HSBC is a former colleague and in insightful analyst of the economy. Ian thinks that the FOMC will not raise rates until 2012 and suggests that another liquidity facility might be necessary to handle the toxic CMBS paper which the Chairman spoke of in his address in New York today.

Here is a relevant excerpt from the Ian Morris analysis:

The bottom line is that this speech has all the hallmarks of a Fed that is planning to do nothing on interest rates for a very long time, helping to support our view that the Fed will not raise rates until 2012. But it does more than that – Bernanke does not say it, but it almost sounds like, given the risks, more, not less, monetary (and fiscal?) accommodation may be required. He says that “normalizing the flow of bank credit…will continue to be a top priority…”. This suggests that whether it is TALF lending ramping up or whether the Fed chooses to keep buying more MBS beyond what has already been announced, the Fed balance sheet strategy may yet be to get larger if required (forget exit strategy – we haven’t even paused the entry strategy yet!).

When it comes to credit availability, The Fed is concerned about the tight conditions’ continuing impact on (a) small business (b) households and (c) commercial real estate. On the latter, he says “nearly $500BN of commercial real estate loans (are) scheduled to mature annually over the next few years…”. That’s over 3.5% of GDP per year.

We suspect if push comes to shove, where banks and securitization markets are unwilling or unable to refinance these commercial real estate loans, the Fed may need to open a new liquidity program for the purposes of refinancing commercial real estate loans (a crazy idea, but a lot of crazy stuff has already happened, so what’s one more?).