Fed to stress test US banks as fourth quarter bounce expected
THE Federal Reserve last night announced it would conduct a fourth round of stress tests to determine if major US banks can withstand a recession on the back of the problems in the Eurozone.
The Fed will test Bank of America, Citigroup, Goldman Sachs, JP Morgan Morgan Stanley and Wells Fargo to see if they could withstand a worsening of the European situation that would tip the US back into recession.
The latest round of tests comes at a time when many are concerned about US banks' exposure to the European debt crisis, which could throw that region into a recession and rattle global financial markets.
Vice-chairman Janet Yellen last week said the Fed would purse the stress tests in coming weeks.
The Fed has performed periodic stress tests on the 19 largest banks it supervises starting in the spring of 2009.
The initial stress test reassured investors that America's biggest banks had the resources to get through the recession and the 2008 financial crisis.
Meanwhile, Michael Bloomberg has attacked President Barack Obama for an absence of leadership as a Congressional super committee failed to hammer out a deficit deal, renewing suggestions that he could mount an independent bid for the White House.
In a stinging rebuke of Mr Obama, who remained on the sidelines as the deal collapsed on Monday, and in a rare intervention into Washington politics, Mr Bloomberg, the mayor of New York, said: "It's the chief executive's job to bring people together and to provide leadership. I don't see that happening."
The Fed move on the banks came as the US economy grew more slowly than previously estimated in the third quarter but the downward revision prompted many economists to predict a bounce in the present quarter.
Gross domestic product grew at a 2pc annual rate in the July-September quarter, the Commerce Department in Wash- ington said in its second estimate yesterday.
The previous estimate was 2.5pc. Despite the downward revision, last quarter's growth is still better than the April-June period's 1.3pc pace.
While the third quarter was weaker than economists had expected, the composition of the report, particularly still-firm consumer spending and the first drop in businesses' inventories in nearly two years, set the stage for a stronger performance in the final months of the current year.
It seems businesses expected consumer demand to weaken during the third quarter and emptied their stocks rather than manufacturing new products.
With consumer spending showing unexpected resilience, analysts said companies will now have to rebuild inventories, keeping factories busy.
"The mix or composition of growth improved. Inventory investment was lower so firms are more likely to produce more goods going forward. And exports rose," said Cary Leahey, a senior economist at Decision Economics in New York.
"So while you lost a half percentage point in the revision to third-quarter growth, you might easily get it back in the fourth quarter of this year or the first quarter of next."
Figures so far suggest the fourth-quarter growth pace could exceed 3pc, which would be the fastest in 18 months.
"We should see a little bit of a bounce in the fourth quarter, then growth will probably grind back down," said Nariman Behravesh, chief economist at IHS.
Pacific Investment Management chief executive Mohamed El-Erian said yesterday that US economic conditions were "terrifying" given that the nation was coming out of recession.
The odds of the US returning to recession were one-third to half, Mr El-Erian said.
While the fourth quarter may see a bounce, there is mounting evidence that consumer spending has been fuelled by reductions in savings that are unlikely to be sustained into 2012. Consumer spending accounts for 70pc of the economy.
"There's certainly a lot of crummy data out there, whether it's wages or income or net worth, the unemployment rate doesn't seem to be moving, but the consumer has held up surprisingly well," said Ron Sargent, chief executive of office-supply company Staples said last week.
The savings rate has dropped to 3.8pc, the lowest since the last three months of 2007. That figure was initially calculated as 4.1pc.
"The savings rate fell very sharply, and that may be an attempt to sustain personal spending, and that's not doable again," said John Silvia, chief economist at Wells Fargo Securities.
"Over time they're going to have to come to grips with the reality that they just don't have whatever it takes to sustain their spending."
US Treasury debt prices were trading modestly weaker in the morning session, while stocks were lower.
The dollar was little changed against a basket of currencies. (Additional reporting by Bloomberg and Reuters)