Burgeoning Inflation, Bigger Fed Powers, Better Lender Response: A Market Report

The economy continued to struggle this week. The most recent statistics shows prices jumped in May as energy costs soared. Prices Americans pay for goods and services is up 4.2 percent for the past year, driven mostly by food and energy costs. When these two items were excluded, prices only rose 0.2 percent.

The higher prices were expected. But they show the pressure being placed on consumers and companies, with higher rates and less credit available to them, and the Federal Reserve, trying to prevent major inflation.

The role of that central bank might expand to better respond to financial emergencies under new recommendations from Treasury Secretary Henry M. Paulson Jr. Paulson is expected to deliver a speech today proposing the Federal Reserve should assume new powers to protect the financial system and intervene in the workings of Wall Street firms.

Responding to the major loss of Bear Stearns, and the emergency steps the Fed took to keep the dissolution from causing a major international catastrophe, Paulson plans to promote the permanent powers of the Fed to respond to any future emergencies. In March, the central bank threw out decades of precedent and provided financial backing for J.P. Morgan Chase's acquisition of Bear Sterns, and made emergency loans available to all major investment firms.

The new recommendations push beyond the financial regulation plan Paulson offered earlier this year, which proposed a bigger role for the Fed without details on what that role would entail. The planned comments for today will offer these details, suggesting the Fed should have the power to step in when a firm poses risk to the system, as well as the power to mandate information sharing from financial institutions to anticipate future problems. This last recommendation will prevent banks and other firms from assuming they can continue risky behavior and still be bailed out.

Paulson's speech comes at the same time as a potential shift in the residential environment. Major mortgage lenders have agreed to assume greater responsibility for and simplify and speed up assistance for assisting homeowners in distress. This move is in response to complaints that lenders have done little to offer help, even as foreclosures climb and late payments skyrocket.

The new guidelines state that lenders will acknowledge borrowers' help requests within five business days, approve or deny requests within 45 days, and update borrowers with status after 30 days. The guidelines also encourage lenders to beef up staff to better respond to homeowners in need, and to consider pausing foreclosure when homeowners contact them.

Related from the Washington Post
Paulson To Urge New Fed Powers
Mortgage Lenders Pledge More Help For Homeowners
Fuel Costs Pushed Up Inflation In May

May Employment Report Spooks the Market

The Labor Department reported on Friday that payrolls in the month of May fell by 49,000 as job losses continued for the fifth consecutive month, now totaling 324,000 for the year. The unemployment rate rose a surprising half a percent from 5.0% in April to 5.5% in May, reflecting the biggest month over month increase since 1986. The number of unemployed grew to 8.5 million in contrast with this time a year ago when the unemployment totals stood at 6.9 million. The impact of the housing and credit crisis is continuing to take its toll on the economy yet skyrocketing energy prices are a significant culprit as well. Most Americans are being hit from both sides as the value of their home is declining just as other expenses are rising resulting in a drop off in consumer spending leading to a further loss of jobs.

The percentage increase in the unemployment rate was sharper than analysts had anticipated, as most had expected a job loss of closer to 60,000 rather than the 49,000 reported. Many teenage students reported entering the workforce and this may have resulted in a seasonal deviation in the report as teen unemployment experienced its biggest spike since 1948. May's employment report was therefore greatly impacted by both new entrants as well as re-entrants coming into the labor pool. Job growth continues to remain fairly robust in the areas of healthcare, education and government hiring. However the jobless rate overall now stands at the highest level since October of 2004. The Dow fell 395 points or 3.13%, the NASDAQ dropped 75 points or 2.96%, while the S&P 500 fell 43 points or 3.09%, sustaining the sharpest sell-off in three months.

Mortgage Rates improved as investors shifted out of stocks. This could be an opportunity to lock in a low fixed rate.