Economic Daily Outlook

MONDAY, APRIL 23, 2012



Bernanke Charts New Mission for the Fed: Financial Stability

While by law the Federal Reserve Board must worry about price stability and unemployment, Chairman Ben Bernanke appears to have charted a third mandate for the central bank: financial stability.

In his speeches, lectures and testimony, Bernanke has steadily elevated the importance of the issue as his agency’s responsibilities have swelled under Dodd-Frank.

“It’s become the unofficial third goal,” said Margaret Tahyar, a partner at Davis Polk & Wardwell. “It’s happening very, very slowly, and it’s interesting that there is a lot of messaging going on about it right now. Until recently, they’ve been doing it on little cat’s paws quietly, quietly.”

The new duty appears born out of necessity after Dodd-Frank tasked the central bank with regulating all systemically important banks and nonbanks. The regulatory reform law also required the Fed to write new rules on a range of topics under the auspices of financial stability, including living wills, capital and liquidity requirements.

But Bernanke has also encouraged the Fed to embrace its new role.

In Presidential Race’s Give-and-Take, Hope for a Fiscal Compromise

When television pundits and aging rock stars start commanding headlines in the presidential campaign, it is tempting to conclude that the election season will merely produce a long, painful case of cat scratch fever.

But beneath the campaign noise, some elected officials and policy experts see improving odds for 2012 to end up yielding much more, including progress toward a deal on tax and budget issues that have confounded Washington’s divided government. Some say the campaign dialogue could even bring a deal closer.

The optimists include leading stakeholders in Washington’s oft-spurned centrist boutique, which may be especially vulnerable to wishful analysis. But two looming events — an automatic $1.2 trillion budget “sequester” hitting defense and domestic spending, and the expiration of all of President George W. Bush’s tax cuts — will create pressure for the two parties to strike a compromise.

“The probability of a deal strikes me as pretty high, since no agreement would be such a disaster,” said Peter R. Orszag, President Obama’s former budget director.



U.S. regulator looks to ease derivatives rules-report

The U.S. regulator overseeing the futures and options market is exploring ways to give large foreign banks and overseas subsidiaries of U.S. lenders a reprieve from planned stringent derivatives rules, the Financial Times reported on Sunday.

New regulations such as higher capital requirements, central clearing and tighter business conduct standards are among the directives planned at reducing the systemic risk of derivatives.

The Commodity Futures Trading Commission (CFTC) is looking to grant a temporary exemption to swap dealers from complying with a number of post-financial crisis regulations governing derivatives transactions, the FT reported, citing people familiar with the matter.

The CFTC is examining, for example, whether a U.S. bank’s foreign subsidiary transacting with foreign counterparties should be exempt from some new rules governing derivatives dealers if the subsidiary’s home country financial supervisors adopt robust oversight, the report said.



G.A.O. Calls Test Project by Medicare Costly Waste

Medicare is wasting more than $8 billion on an experimental program that rewards providers of mediocre health care and is unlikely to produce useful results, federal investigators say in a new report.

The report, to be issued Monday by the Government Accountability Office, a nonpartisan investigative arm of Congress, urges the Obama administration to cancel the program, which pays bonuses to health insurance companies caring for millions of Medicare beneficiaries.

Administration officials, however, defended the project and said they would not cancel it because it could improve the quality of care for older Americans.

In the 2010 health care law, Congress cut Medicare payments to managed care plans, known as Medicare Advantage, and authorized bonus payments to those that provide high-quality care. Investigators found that most of the money paid under the demonstration program went to “average-performing plans” rated lower than the benchmarks set by Congress.

The report said the project would cost $8.3 billion over 10 years, with 80 percent of the cost occurring in the first three years.

Week ahead: Dems, GOP work together on health policy

Democrats and Republicans will work hand in hand this week to make sure the American people have access to medicines and medical devices.

No, it’s not a dream — just FDA user fees.

Congress has until Sept. 30 to reauthorize the user fees that fund the Food and Drug Administration regulators who approve new drugs and medical devices. The Senate Health, Education, Labor and Pensions Committee will mark up its bill on Wednesday. The House Energy and Commerce’s Health subcommittee is also expected to hold its markup soon.

Both parties want to renew the user fee agreements, but unresolved issues remain concerning the right balance between getting new drugs and devices approved quickly versus making sure they’re safe.



Crude to Give Oil Firms a Lift

Once again, soaring crude is lifting the oil industry’s boats—and will likely buoy the earnings of Chevron Corp. CVX +0.01% and ConocoPhillips COP -0.01%.

But Texas behemoth Exxon Mobil Corp., XOM +0.02% which has bet heavily on North American natural-gas production in recent years, is expected to see its profit drop a bit because prices for the commodity have hit decade-low levels. Exxon, however, is expected to post a larger-than-usual dividend increase this week, responding to pressure from shareholders.

Analysts estimate the world’s largest publicly traded oil company is likely to report earnings per share of $2.07, a 3.3% decline from a year ago, as natural-gas prices tumbled 41% to an average $2.50 per million British thermal units in the first quarter, compared with a year earlier. A flood of natural-gas supply, unlocked by hydraulic fracturing, coincided with an unusually warm winter, which depressed demand for the product.



Yet Another Time Bomb

For student aid advocates, the past year has been one crisis after another.

First came a Republican budget proposal that would have slashed the maximum Pell Grant beginning this year. Next were last-second deals that averted a government shutdown and a default on the federal debt. By the time Congress passed a budget in late December, three bills had changed the federal student aid program, each after moments of panic about the future of Pell Grants.

Now the other cornerstone of federal financial aid for needy students, subsidized loans, has joined the Pell Grants in perpetual limbo.

On Friday, President Obama began a full-throated push to stop the interest rate on federally subsidized student loans from doubling in July. But as the president emphasized the issue in a weekly radio address and announced events at colleges in Colorado, North Carolina and Iowa, he set the stage for an all-too-familiar scene: a looming deadline, a fractious Congress, a scramble for ways to offset new spending, and financial aid for millions of students hanging in the balance.



With Pact, U.S. Agrees to Help Afghans for Years to Come

After months of negotiations, the United States and Afghanistan completed drafts of a strategic partnership agreement on Sunday that pledges American support for Afghanistan for 10 years after the withdrawal of combat troops at the end of 2014.

The agreement, whose text was not released, represents an important moment when the United States begins the transition from being the predominant foreign force in Afghanistan to serving a more traditional role of supportive ally.

By broadly redefining the relationship between Afghanistan and the United States, the deal builds on hard-won new understandings the two countries reached in recent weeks on the thorny issues of detainees and Special Operations raids. It covers social and economic development, institution building, regional cooperation and security.

The talks to reach the agreement were intense. At times they broke down altogether, primarily because of geopolitical frictions in the region from two powerful neighbors, Iran and Pakistan. Each country opposes long-term American ties with Afghanistan.


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