FORGET QE: The Next Move From The Fed Is Going To Be 'VE' - page 2
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FED OFFICIAL: The Detroit and Stockton bankruptcies are signs of widespread problems
The municipal bankruptcies in Detroit and Stockton, California, may foretell more widespread problems in the United States than is implied by current bond ratings, a top Federal Reserve official said on Tuesday.
"While these particular bankruptcy filings have captured a considerable amount of attention, and rightly so, they may foreshadow more widespread problems than what might be implied by current bond ratings," New York Fed President William Dudley said at a closed-door workshop on Chapter 9, the part of the U.S. bankruptcy code covering local government insolvencies.
"We need to focus our attention today on addressing the underlying issues before any problems grow to the point where bankruptcy becomes the only viable option," he added, according to a text of his speech.
Dudley, whose Fed district includes the debt-stricken U.S. territory of Puerto Rico, did not mention by name any municipalities or states that risked going the way of Detroit and Stockton. But he highlighted the difficulties some jurisdictions face when they issue debt to finance operating deficits, and when they under-fund public pensions.
In Chicago, for example, unfunded pension liabilities for the city, the board of education and other local governments that draw taxes from it exceed $35 billion, according to the Civic Federation, an independent fiscal watchdog.
The city, which received a warning last week from ratings agency Standard & Poor's, has $8.3 billion in general obligation bond debt and frequently uses debt to close budget shortfalls.
Puerto Rico, meanwhile, is struggling with more than $70 billion in total debt and must overcome opposition from local lawmakers as well as demands from investors for extra security as it attempts to sell more debt.
Dudley said borrowing to pay off a current year operating deficit is inconsistent with running a balanced budget, leaves the municipality with no new asset, and is "equivalent to asking future taxpayers to help finance today's public services."
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Half of the US cities are facing bankruptcy - FED was till now pretending that it does not exist. I am not sure that this is an organized leak or it is done despite the FEDs orders
Fed's Rosengren: Economy growing too slowly to justify rate hike
With little evidence the U.S. economy is rebounding after a very weak first quarter, the Federal Reserve is in no position to start raising interest rates for the first time since 2006, a top Fed official said on Monday.
"The conditions for beginning the tightening of monetary policy have not yet been met," Boston Fed President Eric Rosengren said in remarks prepared for delivery in Hartford, Conn.
The Fed has said it will raise rates only once it sees further improvement in the labor market, and is reasonably confident that inflation is headed back to the Fed's 2-percent target.
But with growth in the first-half of the year likely to run below the economy's potential of about 2 percent growth, "I do not expect to see timely improvements in the unemployment rate and sufficient progress towards the 2 percent inflation target," Rosengren said. "This, in my view, makes a compelling argument for continued patience in monetary policy."
Rosengren's strongly dovish comments come as Fed policymakers prepare to meet in about two weeks to weigh a possible rate hike.
Policymakers have kept interest rates near zero since December 2008, and most, including Rosengren, have long thought they would be able to begin to lift rates this year. Even after the economy's dismal first-quarter performance, policymakers stuck to that view, attributing the slowdown to the effects of a severe winter, and predicting a snapback.
So far there is little sign of such a rebound, Rosengren said. That should get policymakers thinking about whether consumers may be behaving differently since the financial crisis, spending less and saving more than they have in prior recoveries, he said.
And in any case, he noted, the Fed has typically launched past tightening cycles against the background of much stronger growth than seen currently.
"The data have disappointed before, and an appropriately data-dependent monetary policy requires confirmation in the numbers, not just in forecasts of better times," he said.
Rosengren is not a voting member this year on the U.S. central bank's monetary policy committee.
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