Economists Project a Cut in Fed Stimulus this Week

Five years to the week after the darkest days of the financial crisis, the Federal Reserve will take its first step toward unwinding the easy money policies that helped save the global economy, a USA TODAY survey of top economists predicts.

More than 60% of 44 economists say Fed policymakers will dial back their $85 billion in monthly government bond purchases when they meet Tuesday and Wednesday. Almost a third pick either October or December.

The purchases are aimed at holding down long-term interest rates, thus increasing borrowing and investing in order to create jobs and lower unemployment.

The other major component of the Fed's post-crisis policy has been holding its key interest rate close to zero since 2008, which has kept down short-term rates. More than 80% of the economists in USA TODAY's survey predict the Fed will raise that rate in 2015.

Since the Fed began buying longer-term Treasury bonds and mortgage-backed securities a year ago, the unemployment rate has fallen to 7.3% from 7.8%. The program also has fueled a stock rally, but raised concerns such as eventual high inflation.

"When they started, they were worried that (economic) growth was very weak and the unemployment rate was starting to rise," says JPMorgan economist Robert Mellman. Now, he says, the jobless rate "is actually coming down fairly quickly."

Fed Chairman Ben Bernanke first said in May that the Fed likely would rein in the purchases this year and end them by mid-2014, assuming unemployment falls to 7% by then. His remarks roiled stocks and pushed up bond yields.

Mixed economic data recently prompted some analysts to say the Fed will put off tapering until the economy is on firmer footing.

On the bright side, jobless claims have fallen and measures of manufacturing and service-sector activity rose in August. But employers added a disappointing 169,000 jobs last month, capping a three-month slowdown in job gains. The jobless rate fell because of a sharp drop in the number of people working or looking for work.

Several economists say the middling data will prompt a more modest reduction in bond purchases than the Fed initially intended.

Fifty-two percent of those surveyed said the Fed will trim them by $6 billion to $10 billion, while 32% expect a decrease of $11 billion to $15 billion. Richard Moody, chief economist of Regions Financial, expects a $15 billion cut, less than the $20 billion he anticipated a month ago.

The Fed each month is buying $45 billion in Treasury bonds and $40 billion in mortgage-backed securities.

Seven in 10 of the economists say the Fed initially will reduce the Treasury purchases only or mostly, continuing to heavily buy mortgage bonds to hold down mortgage rates. Since Bernanke first mentioned tapering, 30-year fixed mortgage rates have risen from 3.51% to 4.57% and mortgage applications have declined.

Some economists say the weak reports will delay the tapering entirely.

Paul Edelstein of IHS Global Insight expects it to begin in December. "The labor market is still too uncertain," he says.

Even if the Fed does downsize its purchases Wednesday, most economists say the move is largely priced into stocks and bonds.

Michael Englund, chief economist of Action Economics, says a limited bond-buying cut of about $10 billion could even lift stocks a bit and lower bond yields.

Chrysler to File for Initial
Public Offering

Chrysler is expected to file documents in the next two weeks outlining an initial public stock offering despite Fiat's preference to buy 100% of Chrysler's shares, the two companies' CEO Sergio Marchionne has said.

The filing with the U.S. Securities and Exchange Commission will come by the end of this month, Marchionne said last week. It would resolve a protracted legal fight between Fiat, which owns 58.5% of Chrysler, and the UAW's Retiree Medical Benefits Trust, which owns the other 41.5%.

The Italian automaker has offered to buy another 9.9%, but the trust has rejected Fiat's offered price. Fiat sued the trust in Delaware Chancery Court, but a judge has declined to establish a price.

Delaware Chancery Court Judge Donald Parsons said the matter should be settled through a trial, but that might not happen until 2015.

There is a gap of about $200 million between what Fiat offered for the first 3.3% increment and what the UAW trust argues it is worth.

"We need to go through this process of determining value," Marchionne said told reporters in Italy Friday. "(The trust) have been very clear that they are not long-term holders of the assets. They want to monetize, so we need to find a way for them to exit in a way that does not create what I consider to be exceptionally high ... expectations of value.. The market will tell us. Let the market talk."

The trust needs to convert its Chrysler stake to cash because it is responsible for the health care coverage of tens of thousands of UAW retirees.

An IPO will let investors determine what Chrysler shares are worth. But Marchionne is not happy with that solution because it means Fiat won't own 100% of its U.S. partner. His vision is to fully integrate the two automakers and have Fiat shares traded on the New York Stock Exchange.

With separately traded Chrysler shares, the companies would face more accounting and regulatory oversight. By offering those shares to investors, Chrysler will have to disclose how much access Fiat has to its cash and other resources.

In contrast to Chrysler's near-death experience in 2009 and a taxpayer-funded bankuptcy that gave Fiat operating control, Chrysler is now the stronger of the two companies.

Under an agreement that gave Fiat managing control of Chrysler in 2009, the Italian automaker can purchase increments of 3.3% of Chrysler stock every six months.

In January, the UAW trust asked Chrysler to pursue a public offering. Marchionne had hoped to reach a compromise, but the two sides remain far apart.

Marchionnne told reporters last Friday in Italy that Chrysler could receive approval to sell shares before the end of this year or early next year.

"Really in my opinion it is beneficial to both sides to come to an agreement and avoid going through the market," said Richard Hilgert, an analyst with Morningstar.

Chrysler will have to pay attorney fees, investment banking fees and broker fees related to the IPO, Hilgert said.

Fiat is struggling to restructure its European operations that have lost money without the portion of Chrysler that it owns. While auto salesin Europe remain near a 30 year low, Italy, which is Fiat's most important market, has been particularly hard hit.

JPMorgan Nears Deal on ‘London Whale’ Probes

Two published reports from yesterday say securities regulators may fine JPMorgan Chase up to $750 million for its role in the so-called "London Whale" trading scandal.

Citing unnamed sources, Bloomberg News Service and The New York Times website said negotiations between the bank's executives and federal prosecutors and regulators will likely wrap up the next day or two.

A fine of up to $750 million may be levied against the investment bank for the events that led the firm to take outsized bets in complex derivatives trades that resulted in trading losses of more than $6 billion.

JP Morgan's CEO Jamie Dimon apologized for the firm's role after being widely criticized for characterizing the losses as a "tempest in a teapot."

U.S. prosecutors have charged Javier Martin-Artajo and Julien Grout for wire fraud and conspiracy to falsify records related to the losses. Bruno Iksil, the "London whale" who is said to have carried out much of the ill-fated trading and worked under Martin-Artajo, is cooperating with investigators and will likely avoid prosecution.