NEW YORK — A top Federal Reserve official expressed concern Tuesday about inflation in the U.S. and warned the central bank may have to raise rates soon to keep price pressures under control.

“To prevent recent inflation from continuing to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later,” he said.

“To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action,” the official added.

Plosser is currently a voting member of the interest rate setting Federal Open Market Committee, and his comments came from a speech prepared for delivery before the Philadelphia Business Journal Book of Lists Power Breakfast, in Philadelphia.

His comments arrive at a time where central bankers are struggling to contain inflation amid economic growth that has remained stubbornly weak, as financial markets have stumbled from one bout of trouble to the next. Most observers reckon the Fed is being boxed in by this mix of conditions, and as a result, it will maintain its current overnight target rate of 2% for the remainder of the year.

Plosser’s comments about the economy expressed a considerable amount of concern about inflation, although he showed less worry about the state of growth.

“We must be attentive to both growth and inflation in a consistent and systematic way, and as we are all aware, inflation has been rising,” Plosser said.

But he added “inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. Rates hikes “will likely need to begin before either the labor market or the financial markets have completely turned around,” Plosser said.

The official’s outlook on growth has undergone modest changes. “My own outlook for the rest of this year is for continued sluggish growth and weakness in labor markets,” with the U.S. gross domestic product likely rising by 1.7%.

“This is a somewhat better picture than just a few months ago,” Plosser said. But he added, “I still expect sluggish economic growth in the second half of this year and a further increase in the unemployment rate.”

Plosser said he expects the central bank’s preferred inflation gauge, the personal consumption expenditures index, to remain at a rise of 4% this year, reflective of energy price increases. He reckons the core PCE price index — it’s stripped of food and energy costs — will rise by 2.5%. That’s above the Fed’s perceived comfort range.

Plosser added “as energy and other commodity prices level off, I expect both measures of inflation to be lower — in the 2 to 2 1/4% range by the end of next year,” at least as long as Fed acts to make that happen.

Despite Plosser’s inflationary concerns, he argued the U.S. is not seeing a replay of the conditions seen in the 1970s, when the U.S. suffered from stagflation, a mix of low growth and persistent price pressures.

“I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored,” Plosser said.

The official also said the central bank’s preference for looking at prices stripped of food and energy factors may need to change. “Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy,” Plosser said.

By Michael S. Derby
Of DOW JONES NEWSWIRES

After the stock market crash of 1929, thousands of banks failed. In 1933, Congress and then President Roosevelt created the Federal Deposit Insurance Corporation, better known to all of us as the FDIC. A federal government guarantee of deposits. Its effect was to maintain stability and public confidence in the nations banking system.

The failure of Indy Mac Bank has the FDIC stepping in to meet its obligations to payback account holders the value of their insured assets. It is not pretty and as the largest bank failure to date, it is testing the system in a trial by fire way.

But if you believe Senator Barack Obama, that there is “little doubt that the US is likely in a recession” and that swift steps to shore up the housing market are a huge part of that recovery then the FMIC is the obvious answer.

Another stimulus packages and pumping money into Fannie Mae and Freddie Mac are not the answer. The government keeps treating the symptoms and not the disease.

The majority of analysts and economists that look at the problem conclude that stopping home prices from declining is the first step in any recovery. But how are prices to stabilize when lending institutions are pulling back their lending?

As the desire to lend has decreased coupled with higher lending standards and higher levels housing supply, due to a poor economy and foreclosures in some markets, prices can only continue to drop. Actual credit losses and Fannie and Freddie are small compared with their overall portfolio. What they are suffering from is a crisis in confidence.

According to mortgage industry veteran Robert Kofsky, The creation of the FMIC to co-insure FNMA, FHLMC and the Mortgage Insurance Companies against further losses would create new confidence in the mortgage markets, create higher values for mortgage bonds, create additional liquidity for the banks and create additional capital for lending since risk would be reduced by the backing by the FMIC. Using minimum standard qualifying lending requirements, losses would be limited up to a specific dollar amount per property similar to the way the FDIC insurance works now. 

This would provide buyers financing to enter the market with confidence causing home prices to stabilize. Put a halt to or at least reduce write-downs on quality mortgages, create better balance sheets and enable in some cases financial institutions to write-up some exiting investments.

This would further reduce the foreclosures and the cost to the federal government would stay low saving taxpayers money. As it stands now, we are footing the bill for all of it. Rather than pump money into the system to treat the symptoms, let’s cure the disease which is a crisis of confidence. Our history tells us that the creation of the FMIC would have the same desired effect.

Using taxpayer dollars to bail out financial institution or throwing money at the problem like the Treasury and the Federal Reserve seem to do to in their keystone cop response to these situations, finding a viable long-term solution is the only way to cure what ails the financial markets and the economy.

For more information on issues facing retirees and retirement income strategies please visit www.livelongliverich.com.

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When it comes to investing in bonds, some of the basic concepts regarding bond risks tend to elude investors. Most understand the risks associated with stocks. If you invest in a stock, and its price increases, you make money, if it drops you lose. But bond risk has many different components. One of those risks is how the interest rate and maturity effect bond prices.

The maturity of a bond is the date on which the principal amount is repaid and the issuing organization returns your investment to you. You can buy bonds with maturities as short as one week or as long as one hundred years. Clearly the maturity (or maturities) you select should be aligned with your investment goals.

As a rule, most investors should consider bonds with maturities of 20 years or less. Many investors stagger the maturities of various bonds in a portfolio to create a “ladder structure”. This creates a blend of short-term and long-term maturities and interest rates.

If you hold a bond to maturity, assuming the bond you own is not in default, you will get back your initial investment. Between now and then, as interest rates fluctuate, the price of the bond will also fluctuate. That means the price of your bond will go up and down.

If interest rates rise, the current value of a bond will drop. If interest rates go down, the current value should rise. The relationship between interest rates and bond prices is inverse. The price of a short-term bond will fluctuate less than that of a long-term bond because the shorter the maturity, the sooner you will receive your principal back and the sooner you can reinvest at current rates. The shorter time frame reduces the risk that something can go wrong. Because there is less risk of price volatility with a short-term bond compared to a long-term bond, the interest rate should be lower on the shorter maturity. Shorter maturity, less risk, less interest. Longer maturity, more risk, higher interest rate.

What length of maturity should you buy if you think rates are going higher? The answer, shorter term maturities. The value of short term bonds is more stable in a rising interest rate environment. As rates rise, your portfolio will be more stable and you will have bonds maturing enabling you to reinvest at the current higher rate.

You can find more information about bonds and interest rate risks at www.livelongliverich.com and www.investinginbonds.com.

Explaining what can happen to the price of a bond is complicated and many factors go into the value of securities such as credit risk and trading environments. But as far as the relationship between rising interest rates and bonds are concerned, a picture speaks a 1000 words.

NEW YORK — Regulators are starting to evaluate complaints by customers about brokers who hold any of three popular designations that imply expertise in working with seniors and retirees.

The sweep is the second phase in a push by the Financial Industry Regulatory Authority to uncover whether brokers use designations as mere marketing tools to dazzle investors, or whether the titles have some educational value.

Susan Merrill, Finra’s enforcement chief, said her staff is evaluating the requirements behind the three most popular senior-related designations: Chartered Retirement Planning Counselor, Certified Senior Advisor and Chartered Advisor for Senior Living. Finra is also compiling the records of complaints against advisors who hold those designations, to see if any patterns exist.

Protecting retired and elderly investors from unscrupulous financial advisors has been a major focus among state, federal and industry regulators since 2006. Especially with waves of baby boomers beginning to retire, regulators view their huge amounts of assets as vulnerable to would-be predators.

Educating financial advisors on how to help seniors or retirees navigate the financial, health and social challenges facing them isn’t necessarily a bad thing, said Jean Setzfand, director of financial security for the AARP. But, she added, many titles come with training that shows advisors “how to sell to this market,” instead of skills that will actually help clients.

“With so many designations out there, it’s really hard for any individual to figure out…what’s credible and what’s not,” she said.

In the sweep’s first stage, announced in September, regulators found that reps were using more than 50 designations touting experience related to seniors or retirement.

Now, Merrill said, Finra is trying to determine whether the designations are misused. Part of that is finding out what the educational qualifications are for earning the titles. The other part is learning how reps market them.

“If there are designations that are practically self-conferred…how are the firms and reps then marketing that expertise?” Merrill said. “Are they exaggerating the expertise that goes along with it?”

It’s not clear what exactly would constitute a misuse of a title. For example, just listing a designation on a business card may not be considered misleading. But it could be a problem “if someone’s saying, “Because I have this I am therefore qualified to give you retirement-related investment advice,’” Merrill said.

Programs’ Requirements

According to the providers of the titles Chartered Retirement Planning Counselor, Certified Senior Advisor and Chartered Advisor for Senior Living, the coursework for students is rigorous. But the requirements for the three vary widely.

The CASL designation consists of five distance-education courses offered by The American College. The college estimates that it takes 300 to 450 hours — a year or two — to complete the coursework, which includes topics like understanding the older client and fundamentals of estate planning. To participate in the program, people must have three years of professional experience. After completing the coursework, students take closed-book, proctored exams at nearby locations.

A spokesman said the college doesn’t conduct background checks on students, but that it remains in contact with state, federal and industry regulators to monitor those holding its designations.

Those trying for a CRPC, offered by the College of Financial Planning, are tested on the contents of 11 books as part of a self-study program that takes anywhere from 100 hours to 250 hours to complete, according to the college. There are no prerequisites for taking the course, which covers information like sources of retirement income and investing for retirement.

Once someone passes a proctored, online, closed-book exam, he must promise to disclose conflicts of interest and not to solicit business through false or misleading statements or ads. Students must also fill out a form saying whether they’ve been criminal or civil defendants, or are the subject of any investigation. If they answer yes, the college does a background check.

The CSA self-study coursework includes four online courses — including one on ethics — with short, open-book, multiple-choice exams. The courses, along with a textbook that students must read, take 26 to 35 hours to complete, the CSA Society estimates. They must also conduct an interview of a professional in another field who works with seniors and write a 900-word report. They must sign a code of ethics and pass a closed-book, proctored exam before receiving the CSA. Students can also take the course in a classroom environment, where the coursework is slightly different.

Starting in January, candidates who want to sit for the final exam — whether or not they take the course — will have to have some amount of work or volunteer experience working with seniors, or a degree or certificate from an accredited college or university in a field related to working with seniors.

Those who hold CSAs are obligated to inform the Society of CSAs about disciplinary, legal or civil proceedings against them. If they don’t self-report, they can face a one-year suspension of the designation. Also starting in January, CSAs will be required to disclose on marketing materials that the “designation alone does not imply expertise in financial, health or social matters.”

Concerns

Despite the programs’ arguments that their courses are valuable, some investors’ advocates are skeptical of the general idea, especially given the proliferation of such programs.

Some designations give “the impression to potential clients that someone is more important than they are, or more qualified educationally than they are,” said Stuart D. Meissner, an investors’ lawyer. “Often the reality is they just pay a fee and get a book, and they get the degree.”

Finra’s sweep comes alongside efforts by state regulators to curb the types of designations financial advisors can use. Earlier this year, Massachusetts securities regulators adopted a rule saying financial advisors can only use senior designations that have been accredited by a national agency recognized by the state. And the North American Securities Administrators Association is floating a similar model rule.

Merrill said it’s too early to know whether enforcement actions will come out of the sweep, but said “it may help sensitize firms to the issue.” She said she’s already seeing firms get more rigid about what designations they will allow reps to use.

She said five firms have said they would ban the use of senior-services designations by the end of 2007, and others are drafting procedures to oversee their brokers’ use of the credentials.

Merrill said guidance for firms might be the key outcome of the Finra sweep. “We have to help educate firms about how designations are being used,” she said.

NEW YORK — High-yielding utility stocks, a group that has been struggling of late, stand to see something of a potential resurgence following the Federal Reserve’s decision to cut interest rates by 50 basis points on Tuesday, technical analysts say.

The group has certainly pulled back from its spring highs, with the Philadelphia Stock Exchange Utility Index, or UTY, after peaking at 572.89 on an intraday basis on May 15, now at 542.90, up 1.1%.

But now the sector is starting to look like it will be able to hold its own relative to the rest of the market, analysts say.

“The UTY has undergone a turning point, since it moved through resistance of 528, both on Tuesday and today,” said Katie Townshend, chief market technician at MKM Technical Research.

The 528 level is based on a “cloud model,” which is a Japanese trend-following indicator that some technicians use to gauge supply and demand.

“It looks to me like it is going to hold up,” Townshend said.

One reason is that the index, although having gone through a period of trending lower, had not done so, since late June, to the same degree as the Standard & Poor’s 500 Index.

Also, the index’s stochastics oscillator, a measure of overbought and oversold conditions, indicates that there is room before the UTY can be considered overbought, Townshend said.

But not everything is fully in place.

Momentum from the UTY’s recent low of 488.89 on Aug. 16 hasn’t picked up yet, “and that’s what I’m looking out for,” Townshend said.

But, on a weekly basis, the index remains in a long term uptrend because it still has higher lows in place, Townshend added.

Also, support remains intact, ranging from 475 on a long-term basis to 501.95, with the latter being the index’s March low.

With the Federal Reserve having cut its key short-term interest rate aggressively on Tuesday to 4.75% from 5.25%, utility stocks could have greater appeal because of their dividend yield.

The three highest payers on the S&P 500 are Progress Energy (PGN), at 5.3%; Pinnacle West Capital (PNW), at 5.2%; Integrys Energy (TEG), at 5.1%, all now above the new fed funds rate, which influences a myriad of other rates.

Progress Energy, at $47.40, is looking good right now, having broken through its 80-day moving average of $46.30, which has served as resistance since late May, said Ryan Detrick, senior technical strategist at Schaffer’s Investment Research.

In fact, shares hit that level on an intraday basis on Tuesday morning, before the Fed’s meeting announcement.

“Now that it has decisively broken through on heavy volume I wouldn’t be surprised to see the stock revisit its Aug. 9 intraday high of $49.48,” Detrick said.

Pinnacle West, at $40.30, has been pretty much been moving sideways since the beginning of July, which puts it in a neutral state as far as far as making a decision of whether to buy or sell shares.

Still, Detrick feels the stock is positioned to get past $41, based on the way it’s charting, creating a bottoming formation from which to move higher with some momentum.

If shares do breach $41 on a closing basis, he projects the stock could push upward on strong accumulation, or buying, and have a shot at $44.47, its June 15 intraday high.

Integrys Energy, at $52, has also been in a sideways consolidation pattern since late June, but has now broken out.

The breakout is based on the stock moving above a downward trendline on strong momentum on Tuesday.

“Now, the path of least resistance is higher,” Detrick said.

Federal Reserve Chairman Ben Bernanke moved aggressively to stop the spreading credit crunch from sinking the nation’s economy with a surprising half-percentage-point cut in interest rates, casting aside for now worries about appearing to bail out investors.

The cut, which exceeded the quarter-point reduction most economists had expected, signals that Mr. Bernanke, fearing broad damage from the market turmoil that erupted a month ago, preferred to risk doing too much rather than too little. The move came amid a sizable drop in home sales, construction and prices that could send mortgage defaults higher and damp consumer spending.

With yesterday’s move, Mr. Bernanke may have shown himself closer in style and tactics to predecessor Alan Greenspan than some market watchers had suspected. That carries risks: Critics may start referring to the “Bernanke put,” as they once spoke of the “Greenspan put” under the former Fed chairman. (A put option protects its holder from a loss on an investment.) Yet Mr. Bernanke has shown that giving the impression he might be shielding investors matters less than keeping the economy out of recession.

That’s how Mr. Greenspan interpreted the Fed’s action. “The question they had to weigh was, “Was punishing those [speculators] more important than doing something that they perceived to be in the greater good?’” he said in an interview yesterday with Fox News Channel’s Neil Cavuto.

The Fed cut its target for the federal-funds rate, charged on overnight loans between banks, to 4.75% from 5.25%. It also cut its discount rate, charged on direct loans to banks, by the same amount, to 5.25%.

The cuts sparked a rally on Wall Street. The Dow Jones Industrial Average, up just 70 points before the decision was announced, soared 335.97 points, or 2.5%, to 13739.39, its biggest percentage gain since 2003.

But in a sign some investors fear that the cut could also foster inflationary pressures, the dollar fell sharply, long-term Treasury-bond yields rose, and oil prices also jumped. Crude-oil futures surged 94 cents a barrel to $81.51, a second consecutive record on the New York Mercantile Exchange but still well short of the inflation-adjusted high of $101.57 hit in April 1980.

In a break from the past, the Fed did not say whether higher inflation or weaker growth was its greatest worry or whether those worries were equal; it thus gave no hint about what its next move would be. “Some inflation risks remain,” it said. But “developments in financial markets … have increased the uncertainty surrounding the economic outlook.” Markets put high odds on a quarter-point cut at the Fed’s next meeting, on Oct. 30.

The half-point cut put an exclamation point on a drama that began more than a month ago. At its last meeting, Aug. 7, the Fed left the federal-funds rate, its main target for short-term interest rates, at 5.25% and signaled continued worries about inflation. Days later, credit-market concerns erupted in Europe over losses in bank-linked hedge funds and off-balance-sheet investment vehicles that had purchased U.S. subprime mortgages. In the following weeks, investors and lenders became increasingly suspicious of each other and unwilling to lend, driving up interest rates for all sorts of borrowers.

On Wall Street, cries soon rose for the Fed to cut rates immediately. Instead, the Fed on Aug. 17 cut its discount rate by half a percentage point and eased terms on direct loans from its discount window in hopes banks would use the Fed’s cash to restore liquidity to credit markets. The aim, Fed officials said at the time, was to make a distinction between the Fed’s role of keeping the financial system functioning normally, and its responsibility for economic stability.

By contrast, Mr. Greenspan tended to treat financial stability and economic stability as inextricably linked, and saw a rate cut as the best way both to restore investor confidence and cushion the economy.

His critics say those cuts over time emboldened investors to take on ever more debt and drive asset prices — first stocks, then houses — to ever-loftier levels, making the ultimate correction more painful. That criticism has intensified both with the turmoil in housing and the recent release of Mr. Greenspan’s memoir.

Mr. Bernanke heard that criticism, but ultimately has shown himself of much the same mind as Mr. Greenspan: the Fed can’t take responsibility for asset prices, only for growth and inflation.

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” the Fed said in a statement accompanying yesterday’s decision. “Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.”

Fed officials had been leaning toward a rate cut in recent weeks, but the case for the larger move may have been sealed by a report two weeks ago revealing that employment declined in August for the first time in four years. That showed the economy had slowed markedly even before the full force of the market turmoil had been felt.

As recently as July Fed officials had expected the economy to grow around 2.5% this year. While the Fed has lowered that forecast, the size of its rate cut was motivated more by the wide range of possibilities around that new forecast, due to the still-unknown reaction of business and households to tighter credit markets. The larger-than-expected cut represents insurance against more catastrophic scenarios.

The market turmoil is likely to hit housing first and hardest. Investors have grown wary of holding loans from all but the safest borrowers. That has led to a sharp jump in rates on “jumbo” mortgages — those above $417,000 — which can’t be sold to federally chartered mortgage giants Fannie Mae and Freddie Mac. The ranks of home buyers have thinned, especially in high-priced markets, and borrowers with shaky credit have difficulty finding a mortgage at any rate. The lack of buyers will likely drag down sales, make it even harder for home builders to trim bloated inventories, and force them to drop prices further.

John Makin, a scholar at the American Enterprise Institute, said even with the rate cut, the economy will probably shrink in the fourth quarter of the year, though by less than if the Fed hadn’t acted. “If the economy continues to weaken, credit conditions will weaken again because [of] falling housing prices. You’ve got to break that cycle, where you have bad credit, bad economy, bad credit, bad economy. They’re taking a first step to break that cycle.”

David Seiders, chief economist at the National Association of Home Builders, said even though Treasury-bond yields — the main determinant of mortgage rates — rose slightly yesterday, the rate cut might boost credit market confidence and lead to a narrowing in the spread between mortgage rates and Treasury yields, allowing mortgage rates to fall.

Several banks announced they were cutting their prime rates, the benchmark for many consumer and commercial loans, to 7.75% from 8.25%.

It was only a month ago the Fed declared it was still more worried about higher inflation than weaker growth. Those concerns haven’t entirely ebbed: yesterday the Fed said that while underlying inflation had “improved modestly this year … some inflation risks remain.”

Allan Meltzer, a Fed historian at Carnegie Mellon University, said the cut was a mistake, reminiscent of the 1960s and 1970s, when the Fed put more emphasis on unemployment and less on inflation in its actions. That caused inflation to ratchet higher over the years until Fed Chairman Paul Volcker brought it down again. “What’s the market saying?” Mr. Meltzer said. “That this is an expansive move that will bail out the economy.”

He added: “I never believed in the “Greenspan put.” But the market believes it, and now it will certainly believe there will be a “Bernanke put.’”

Some Fed officials may have shared similar concerns either about inflation or about the risk of stoking further speculation. Only seven of the Fed’s 12 reserve banks requested the half-point cut in the discount rate. Four of the five absent banks are headed by presidents who have raised such concerns. None of the four, however, have a vote on the Fed’s policy-making Federal Open Market Committee this year, and that may be why the vote to cut the federal-funds rate was unanimous.

As expected the Fed held the fed fund target rate at 5.25%

The statement said (for comparison the prior statement is immediately below today’s)

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.