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The BAN Report: Fed Pivots / Mod Relief Lapses / Credit Bureaus Lead Complaints / Ships Keep Cruising / Sprawl Crawls Back

Fed Pivots

After spending over a year propagating that inflation is transitory, the Fed is pivoting to rate increases beginning as soon as March, with the market expecting 3 or so rate increases in 2022.   

Minutes of their Dec. 14-15 meeting, released Wednesday, showed officials believed that rising inflation and a very tight labor market could call for lifting short-term rates “sooner or at a faster pace than participants had earlier anticipated.”

Some officials also thought the Fed should start shrinking its $8.76 trillion portfolio of bonds and other assets relatively soon after beginning to raise rates, the minutes said. Investors would see the move as another way for the Fed to tighten financial conditions to cool the economy.

Julia Coronado, founder of economic-advisory firm MacroPolicy Perspectives, said that the minutes prompted her to move up her forecast for rate increases to begin in March, instead of June.

“The Fed is on a glide path to hiking in March,” said Neil Dutta, an economist at research firm Renaissance Macro. “It is hard to see what is going to hold them back.”

Most central bank officials, in projections released after last month’s meeting, penciled in at least three quarter-percentage-point rate increases this year. In September, around half of the group thought rate increases could wait until 2023.

Before raising rates, the Fed wants to taper its bond-purchasing program.

The Fed wants to end the bond-buying program, a form of economic stimulus, before it lifts short-term rates to curb inflation. “The whole point of accelerating the tapering was…so the March meeting could be a live meeting” to raise rates, said Fed governor Christopher Waller in remarks on Dec. 17. “That was the intent.”

While rate cuts can be fast and dramatic, rate increases tend to be deliberate and predictable, in order to give the market time to digest higher rates. It’s encouraging that the Fed is changing course after the data suggested that inflation was more persistent then believed.

We are now moving away from a highly stimulative environment featuring record-low rates and unprecedented government spending. While we expect additional credit problems as rates increase, this is great news for US banks, who will finally see some improvement in their margins. In early December, the 10-Year Treasury stood at 1.357% - now it’s at 1.739%.   

Mod Relief Lapses

The CARES Act in 2020 gave banks relief from TDR status for loans modified due to COVID-19, providing the borrower was current as of 12/31/2019. This encouraged banks to do COVID interest and/or principal deferrals to borrowers, as they could essentially do them without any penalty. This relief expired on January 1 and could have implications for commercial real estate, according to Globe St.

“In talking to bankers and lawyers, there has been a whole lot of kicking the can down the road,” Scott Williams, a partner at law firm RumbergerKirk and specialist in bankruptcy and restructuring, tells “They didn’t have to report it. Kick the can down the road and keep the credit. Banks are going to have to start reporting it and being more active about their bad loans.”

Being more active includes accounting requirements for handling impaired values of assets, which would include writing down the impaired part and then making arrangements, such as potentially calling in loans, demanding additional capital payment to keep the loan to value percentages where the bank wants them, or selling the loans at some loss to another institution.

“I think real estate is someplace where you’re going to see some of this,” says Williams. “There are two things that have taken place. Number one, there is a lot of money sloshing around the system. If I’ve got a bad loan, maybe I can refinance with a different lender.” A bank might be “willing to take a small haircut because they have a TDR at the beginning of the year, and they want to get it off their books and onto someone else.”

CRE borrowers who have properties with impaired values should look into their options now, because come January, they may find their lenders in a sudden hurry to catch up on compliance.

So, if a loan is modified today, it would now be subject to ASC 310-40, and could be considered a TDR and/or subject to a potential downgrade. However, for banks that have adopting CECL, ASC 310-40 is scheduled to go away.   

Stakeholders said that once an entity begins applying ASC 326, the required accounting and disclosures for a loan modified in a TDR no longer provide decision-useful information. That’s because ASC 326 requires the recognition of lifetime expected credit losses when a loan is originated or acquired, so the effect of many credit losses that occur in loans modified in TDRs are already included in the allowance for credit losses.

The proposal would also require enhanced disclosures for modifications made to borrowers experiencing financial difficulty. The disclosures would focus on the types and magnitude of modifications provided, along with their success in mitigating potential losses. For modifications that result only from an insignificant delay in payment, entities can choose whether to include those modifications in their disclosures.

The proposal would eliminate the “once a TDR, always a TDR” requirement for loan disclosures but require entities to make disclosures about the performance of modified loans to borrowers experiencing financial difficulty in the 12 months before the date of the financial statements. Entities will need to make sure they have appropriate processes and controls in place to support these enhanced disclosure requirement. 

The comment period on the proposed FASB rule ended last month. Since ASC 326 already requires banks to estimate credit losses at origination, a continued TDR designation seemed unnecessary.   However, they will still need to make disclosures regarding modified loans, and bank analysts we’ve talked to said this would change very little, as they would still consider modifications as part of the troubled loan bucket. Moreover, if a loan is modified, its likely to be either substandard or special mention anyway.  

Credit Bureaus Lead Complaints

According to a report from the CFPB, more than half of all complaints are directed at the 3 major credit bureaus.

A new report from the Consumer Financial Protection Bureau reveals that more than half of the complaints the agency has received from the public from January 2020 to September 2021 were directed at Equifax, Experian or TransUnion, the three largest credit reporting firms.

The CFPB said consumers focused their frustration on automated systems that made it difficult to correct faulty information in their reports; an exasperating dispute process; and surprise debts such as medical bills reported to the companies without their knowledge. And the agency found the credit bureaus provided significantly less help last year when consumers protested, offering relief in 2 percent of cases, down from 25 percent in 2019.

“America’s credit reporting oligopoly has little incentive to treat consumers fairly when their credit reports have errors,” CFPB Director Rohit Chopra said in a statement. “Today’s report is further evidence of the serious harms stemming from their faulty financial surveillance business model.”

The Consumer Data Industry Association, which represents the credit bureaus, said it is reviewing the report and agrees with the federal consumer watchdog that “responding to legitimate consumer complaints and getting credit reports right are paramount.”

“The CFPB report highlights trends including increased activity by certain credit repair companies, which can inflate complaint numbers and undermine the process of addressing legitimate requests,” the industry group said in a statement. “We are committed to continuing to work with the FTC and CFPB to protect consumers against these harmful and abusive tactics.”

Improving the credit bureau reporting process seems to be a good role for the CFPB, as errors in credit reports can be devastating to borrowers.    Rather than fix the problems, the credit bureaus seem more interested in blaming credit repair companies.   

Ships Keep Cruising

Despite record-levels of COVID cases with the Omicron variant, Americans seem to be largely shrugging it off. Flights are being canceled largely due to issues with crews, not due to falling demand. A good example is the cruise industry, which has seen strong demand despite CDC warnings to stay away.

Two days later, the Centers for Disease Control and Prevention told Americans to avoid travel on cruise ships, regardless of their vaccination status. The advisory, the agency’s highest coronavirus warning, came in response to a surge in cases in recent weeks, caused by the spread of the contagious Omicron variant.

But even as case numbers rise, and criticism mounts about the safety of cruising and over cruise line protocols in reporting cases to passengers, ships keep sailing and guests keep embarking, adamant that the onboard environment is safe because of stringent health and safety requirements, including pre-departure testing and vaccine mandates.

Consider the New Year’s Eve festivities held on ships around the world. One day after the C.D.C. announcement, as dozens of crew members and other passengers were confined to small cabins, infected and quarantined, thousands of revelers packed into ship bars, casinos and deck venues, partying like it was 2019.

Harvey Freid, 56, recently returned from a 17-day sailing to Antarctica, during which one positive case was reported. But Mr. Freid, an avid cruiser, is undeterred and is scheduled to go on a Caribbean cruise in late January.

“The cruise ships do a very good job of handling Covid, and I think it’s safer than my building in Miami and most places that I go on land, because people are vaccinated and cases are quickly identified and isolated,” he said.

The cruise industry’s trade group, Cruise Lines International Association, called the C.D.C.’s warning “perplexing,” and said that cases identified on ships “consistently make up a slim minority of the total population on board — far fewer than on land.”

“No setting can be immune from this virus — however, it is also the case that cruises provide one of the highest levels of demonstrated mitigation against the virus,” the group said in a statement.

I am attending the CREFC Miami conference early next week and I was told that as many people are signing up to attend in person, as those that are canceling or switching to remote. A few attendees are attending as individuals, since many of the banks pulled their participation.    Business travelers remain skittish, but the consumer seems determined to travel.  

Sprawl Crawls Back

The pandemic has accelerated development in suburbs further from the core city, after a period in infill development dominated the conversation. Builders want to build where it’s cheaper and easier.

Home builders worked at a near-record post-Great Recession rate in 2021, with 1.7 million starts in November alone. Keeping that pace means building where it’s easiest and quickest — greenfield sites at the suburban fringes, not pricey urban infill with longer permitting processes. Across the South, exurban counties have grown 15%, twice the U.S. rate, including Lancaster County, South Carolina, a magnet for commuters from Charlotte, and Nassau County near Jacksonville, which grew by 23% in the last decade. 

According to Chuck Fowke, chairman of the National Association of Home Builders (NAHB), the shift in construction from high-density metro areas to more affordable regions, which accelerated at the start of the pandemic, ramped up in 2021. NAHB stats show so-called outlying areas of small and major metros accounted for 18% of homes built in the third quarter of 2021. 

“The outskirts of yesterday are the mainstream of today,” said Jacque Petroulakis, executive vice president of marketing for NexMetro Communities, a national builder of single-family rental home communities in suburban and exurban areas. “Ten years ago, people said I can’t believe you’re building in that market. Now, that same market is considered close in.”

While the pandemic may have helped, Petroulakis argues the overall trend was already well underway, thanks to a “perfect storm” of high rental costs and home prices. A December study of the top 100 metros by Markerr found that single-family home prices were up 18% year-to-date, with Austin, Boise and Phoenix surging 34%. Despite the sticker shock, the desire for a homeowner lifestyle isn’t going away. Covid’s much-discussed “urban exodus” was a more of a suburban shuffle, with city dwellers in places like Washington, D.C., and Columbus, Ohio, migrating to outlying areas. Falling immigration has also stymied population growth in many larger U.S. cities, especially relative to suburbs. 

The continued shift outward is “clearly going to continue,” said Adam Ducker, chief executive officer of RCLCO, a real estate consulting firm. “What happened to the voice and forces working against this kind of growth?” he said. “Seemed like smart growth and regionalism had become part of the religion of the development community. How did the discussion turn so quickly?”

Given an obvious need for more housing, banks need to lend more aggressively to homebuilders, but they seem to be afraid of repeating the mistakes of the mid-2000s. I recently pitched a publicly traded bank about the opportunity, and it was a short conversation. Perhaps, banks struggling with loan growth should take a closer look.

The BAN Report: Big 4 Bank Earnings / Overheating Housing Market / Resi Underwriting Update / RIP Libor

Big 4 Bank Earnings

The nation’s four largest banks have released their earnings.

Bank of America

Bank of America had a good quarter, beating its earnings estimates and slightly missing on revenue.

The lender said that fourth-quarter profit rose 28% to $7.01 billion, or 82 cents a share, topping the 76 cents a share average estimate of analysts surveyed by Refinitiv. Revenue rose 10% to $22.17 billion, just under the $22.2 billion estimate.

The second-biggest U.S. bank by assets said that credit quality improved during the quarter, allowing it to release the $851 million in reserves and book a nearly half-billion-dollar benefit after $362 million in charge-offs. The bank said it was the lowest loss rate for loans in more than five decades.

CEO Brian Moynihan was upbeat on loan growth, stating that the 4th quarter “represented the strongest quarter of organize loan growth we have experienced at Bank of America.” From the prior quarter, B of A grew loans by almost 3%. Net interest yield was 1.66%, still down from the prior quarter by a basis point, but this figure can only go up. Bank of America seems mostly done with reserve releases, which has bolstered profits for banks for the past year. Their allowance for loan and lease losses ratio is 1.28% - down from 2.04% a year ago.

Wells Fargo

Wells had one of its best quarters in years, beating on earnings and crushing revenue expectations.

Earnings per share: Adjusted $1.25 per share, excluding certain items, topping the consensus estimate of $1.13 per share from Refinitiv.

Revenue: $20.856 billion, topping consensus estimate of 18.824 billion, according to Refinitiv.

Results were helped by a $875 million reserve release that the bank had set aside during the pandemic to safeguard against widespread loan losses.

“As the economy continued to recover we saw increased consumer spending, higher investment banking fees, higher asset-based fees in our Wealth and Investment Management business, and strong equity gains in our affiliated venture capital and private equity businesses,” Wells Fargo CEO Charlie Scharf said in a statement.

Scharf also noted that after starting the year weak, lending began to pick up in the second half of 2021 with 5% growth in loans from its consumer and commercial portfolios in the final six months.

“We continued to manage credit well and the strong economic environment helped reduce charge-offs to historical lows and our results benefitted from reductions in our allowance for credit losses,” Scharf added.

After struggling for years, Wells Fargo finally has the wind at its back.

The fourth biggest U.S. bank by assets is considered by analysts to be one of the best plays for a rising interest rate environment because of its vast retail banking network and large deposit base. Rising rates allow banks to charge more for loans, fattening their profit margins.

Rising rates are great news for banks, especially those with more floating rate loans. Moreover, Wells has more room to release reserves, as their ALL % stands at 1.54%.


Citigroup had a disappointing quarter, and the market reacted negatively, although much of the miss had to do with a one-time charge.

Earnings per share: $1.46 vs. $1.38 estimated by Refinitiv.   Revenue: $17 billion vs. $16.75 billion expected.

The company’s net income dropped 26% to $3.2 billion. Citigroup cited an increase in expenses for the sharp decline, adding that the results included a “pre-tax impact” of about $1.2 billion related to the sale of its consumer banking businesses in Asia.

Citigroup reported an 18% year-over-year increase in operating expenses to $13.5 billion for the quarter.

When Jane Fraser took over for predecessor Michael Corbat a year ago, her mandate was to improve returns at the third-biggest U.S. bank by assets.

To do so, she has opted to exit less-profitable parts of the firm’s global empire. Her first major strategic move was to leave 13 retail markets across Asia and Europe; since that April announcement she has disclosed plans to depart South Korea and Mexico.

Citigroup is in transition, although it wasn’t a great quarter. They actually shrunk loans in the fourth quarter, while other banks saw record loan growth.

JP Morgan Chase

JP Morgan Chase beat on both revenue and earnings, but a downbeat forecast got the attention of the market.

CFO Jeremy Barnum told reporters on a conference call that management expected “headwinds” of higher expenses and moderating Wall Street revenue to cause the company’s returns to dip from recent years. That means it’s likely the bank will miss the firm’s 17% target for returns on capital, he said.

“Over the next one to two years, we expect to earn modestly below that target as the headwinds likely exceed the tail winds,” Barnum said, adding that the goal is still valid over the “medium term.”

JPMorgan will see expenses climb 8% to about $77 billion in 2022, Barnum added, driven by “inflationary pressures” and $3.5 billion in investments.

When asked if a tight labor market was forcing JPMorgan to pay its personnel more, Barnum had this response: “It is true that labor markets are tight, that there’s a little bit of labor inflation, and it’s important for us to attract and retain the best talent and pay competitively according to performance.”

Nevertheless, the bank will benefit from the rising interest rates and loan growth that have attracted investors to the financial industry in recent months. Net interest income is likely to hit roughly $50 billion this year, a gain of $5.5 billion from 2021 on the anticipated rates and “high single-digit” loan growth, Barnum said.   

Loan growth grew 2% from the prior quarter, demonstrating how loan growth really picked up at the end of 2021. ALL/loans is down to 1.08%, so we do not expect future reserve releases. 

Overall, the ‘Q4 earnings were positive for the four largest banks, as there was meaningful loan growth in the fourth quarter that should be reflected throughout the banking industry as well. Higher rates are good news for banks. On the negative side, banks can no longer rely on reserve releases to meet their numbers.   

Overheating Housing Market

In 2021, home prices rose a whopping 16.9%.

Home prices grew at a record pace across the country last year as buyers vied for a limited number of homes for sale. Homes sold faster than ever, with many sellers receiving multiple offers above the list price. Existing-home sales rose 8.5% from a year earlier to 6.12 million, the National Association of Realtors said Thursday.

Housing economists expect the market frenzy to subside in 2022, as interest rates are projected to continue rising. But many still anticipate a busy first half of the year, as demand remains robust. In the near term, buyers could rush to buy homes before borrowing costs go up further, they say.

Home sales slowed at the end of the year as the supply of homes for sale fell to a record low. Existing-home sales declined 4.6% in December from the prior month to a seasonally adjusted annual rate of 6.18 million, NAR said. December sales fell 7.1% from a year earlier.

The median existing-home price in 2021 rose to a record $346,900, up 16.9% from 2020, NAR said.

Rising mortgage rates are likely to weigh on home sales this year, said Lawrence Yun, NAR’s chief economist. But demand remains strong so far, he said.

“Buyers are there, but the lack of inventory is hindering some of the sales activity,” Mr. Yun said.

Despite increases that are not sustainable, many believe that we are in for more of the same, as the supply/demand dynamics are not changing in the buyers favor.

“It’s not a bubble, it really is about the fundamentals,” said Jenny Schuetz, a housing researcher at the Brookings Institution. “It really is about supply and demand — not enough houses, and huge numbers of people wanting homes.”

You might also expect home buyers to get fed up with soaring prices. But that answer falters in, say, Salt Lake City when asking prices that look absurd to local buyers seem reasonable to someone moving in from Seattle.

Today, first-time home buyers in once-affordable markets have competition from all kinds of sources that didn’t exist a generation ago: from global capital, from all-cash “iBuyers” that size up homes by algorithm, from institutional investors renting single-family homes, from smaller-scale investors running Airbnbs.

“It’s really hard for an owner-occupier to compete with the amount of money that’s flowing into this region,” said Dan Immergluck, a professor at Georgia State in Atlanta. There, even in a Sun Belt market with robust new housing construction, supply still can’t keep up with demand.

Perhaps at some point in the medium term, the geographic reshuffling of remote workers will settle down, calming price growth in places like Boise, Idaho, and Denver that have been most jolted by it. But the investor purchasers aren’t going away. Nor are new technologies that enable homes to sell at a much faster pace.

Rising mortgage rates should help slow the growth in home prices. But they won’t affect anyone paying cash. And higher rates will make home owning even less affordable.

“For first-time home buyers, they’re going to find it very, very difficult to get a home in the next two, three years,” said Mark Zandi, the chief economist at Moody’s Analytics. And in the meantime they’ll be paying higher rents, cutting into their ability to save for a down payment.

While high teens appreciation isn’t sustainable, there is nothing except higher rates that will stop housing increases.

Resi Underwriting Update

Late last year, FHFA raised the conforming loan limits significantly, increasing by almost 20%.

The Federal Housing Finance Agency (FHFA) today announced the conforming loan limits (CLLs) for mortgages to be acquired by Fannie Mae and Freddie Mac (the Enterprises) in 2022. In most of the U.S., the 2022 CLL for one-unit properties will be $647,200, an increase of $98,950 from $548,250 in 2021. 

For areas in which 115 percent of the local median home value exceeds the baseline conforming loan limit, the applicable loan limit will be higher than the baseline loan limit. HERA establishes the high-cost area limit in those areas as a multiple of the area median home value, while setting a "ceiling" at 150 percent of the baseline limit. Median home values generally increased in high-cost areas in 2021, which increased their CLL. The new ceiling loan limit for one-unit properties will be $970,800, which is 150 percent of $647,200. 

Attached is the conforming loan limits for 2022. For the vast majority of the country, the limits are still $647,200.  Additionally, Fannie and Freddie will be allowing lenders to use desktop appraisals, starting in March of this year.

The two major government-related mortgage investors will add desktop appraisal messaging to their automated underwriting systems in March. Freddie’s system feedback will indicate whether or not desktop appraisals can be submitted starting on March 6. Fannie plans to roll them out as part of an update to its AUS during the weekend of March 19.

AUS acceptance of desktop appraisals at both government-sponsored enterprises will be subject to restrictions based on the loan-to-value ratios of the mortgages involved. Fannie may otherwise allow them on single-unit purchase loans with a complete subject property address if they meet other typical eligibility criteria.

Several types of collateral will be ineligible, including second homes, condominiums, cooperatives, manufactured housing, and properties that either are being used for investment or have resale restrictions.

The Agencies are taking steps to support the rapidly appreciating housing market, which certainly carries some risks. While moving to desktop appraisals makes sense in many cases, it should be done cautiously as there could be huge problems when no one actually visits the property. Perhaps, the lenders should be required to do at least a site inspection.

RIP Libor

After a robust life, LIBOR passed away earlier this month at the age of 52.   

Known as Libor, the interest-rate benchmark once underpinned more than $300 trillion in financial contracts but was undone after a yearslong market-rigging scandal came to light in 2008. It turned out that bankers had been coordinating with one another to manipulate the rate, pronounced “LIE-bore,” by skewing the number higher or lower for their banks’ gain.

Libor could no longer be used to calculate new deals as of Dec. 31 — more than six years after a former UBS trader was jailed for his efforts to manipulate it and others were fired, charged or acquitted. Global banks including Barclays, UBS and Royal Bank of Scotland ultimately paid more than $9 billion in fines for fixing the rate for their own profit.

Randal Quarles, then the Federal Reserve’s vice chair for supervision, offered a scathing early eulogy in October, saying Libor “was not what it purported to be.”

“It claimed to be a measure of the cost of bank funding in the London money markets, but over time it became more of an arbitrary and sometimes self-interested announcement of what banks simply wished to charge,” Mr. Quarles said.

While regulators and central bankers were relieved by its departure, Libor will be mourned by many bankers who used it to determine the interest rates for all kinds of financial products, from various types of mortgages to bonds.

“There are not many corners of the financial market that Libor hasn’t touched,” said Sonali Theisen, head of fixed-income electronic trading and market structure at Bank of America. Even so, she said, getting rid of it was “a necessary surgical extraction of a vital organ.”

A decade or so ago, my father bragged to me that he was so well regarded by his bank that they deemed him worth of a “Libor loan.” Customers would often snicker at floating rate loans based on WSJ Prime, believing Libor was so much better.   

Jason Kuwayama of Godfrey and Kahn opined, “Traditional and non-traditional lenders already had begun the switch from LIBOR to SOFR or BSBY in anticipation of LIBOR’s extinction, with SOFR being the predominant index among traditional lenders. That switch yielded fairly complex language in loan documents, especially renewals.  Given that SOFR is based on values from prior periods rather that LIBOR’s forward-looking rates, I wouldn’t expect more streamlined language in the near-term until TERM SOFR’s longer-term benchmarks become established and trusted by lenders.”

The BAN Report: Strong 'Q4 / Fed Confirms Rate Increases / Grocery Goods Rise / Southwest Says Worst of Omicron is Over / Puerto Rico BK Over

Strong ‘Q4

The US economy rebounded strongly in the fourth quarter from the prior quarter, capping off a very strong year for economic growth.

The U.S. economy grew rapidly in the fourth quarter of last year, advancing to a 6.9% annual rate, capping the strongest year of growth in nearly four decades as the country rebounded quickly from the pandemic-induced recession.

But growth recently has run into obstacles that could lead to much more modest growth this year, economists say.

Gross domestic product, the broadest measure of goods and services, in the fourth quarter was triple the third quarter’s growth of 2.3%, the Commerce Department said Thursday. The gain reflected solid spending by households, much of it occurring early in the quarter, and companies pushed to restock their shelves to overcome persistent supply shortages.

Thursday’s report contained warning signs. Most of the growth owed to companies’ restocking rather than people and firms buying stuff. In part, the rise in inventory investment reflected a rebound from super-low inventory levels in the summer. Inventory levels remain low because of persistent shortages. Excluding the inventory effects, output grew at a modest annual rate of 1.9% in the fourth quarter.

Americans reined in shopping toward the end of the quarter, according to other Commerce Department data on retail sales, as the Omicron variant of Covid-19 triggered a new wave of infections and higher prices cut into their paychecks. A separate Commerce Department report Thursday showed sales of durable goods—long-lasting items such as cars, refrigerators and bulldozers—fell in December.

“The headline 6.9% figure is probably a bit overly optimistic assessment of the underlying strength of demand,” said Andrew Hunter, chief U.S. economist at the research firm Capital Economics. “We do think it’s increasingly the case that the economy is essentially at or rapidly approaching that capacity-constrained, potential level…The speed limit is lower now than it was before the pandemic.”

GDP grew at 5.7% in 2021, as the economy buoyed by stimulus and an accommodative Fed roared back strongly. The strong GDP numbers will increase the pace of future Fed rate increases.

Fed Confirms Rate Increases

Yesterday, the Fed confirmed that they will start raising rates in March and may continue to raise them at a faster rate.

Fed Chairman Jerome Powell said Wednesday that the central bank was ready to raise rates at its March 15-16 meeting and could continue to lift them faster than it did during the past decade.

“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” he said at a news conference following a Fed policy meeting.

Mr. Powell left the door open to raising rates at consecutive policy meetings, which are held roughly every six weeks. That is something the Fed hasn’t done since 2006.

“I don’t think it’s possible to say exactly how this is going to go,” he said. Earlier, Mr. Powell said, “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”

Mr. Powell’s remarks led investors in interest-rate futures markets to fully anticipate a March rate increase of at least one-quarter percentage point and a nearly 70% chance of a second rate increase by the Fed’s meeting after that in early May, according to CME Group.

Mr. Powell suggested that the Fed wasn’t likely to offer any forward guidance, the term used for the central bank’s statements describing its intentions with interest rates over the next few years. Forward guidance has been a central feature of Fed policy.

The Fed wants to maintain flexibility as the economy is still volatile. The dollar rallied as the Fed’s more hawkish stance is good for the greenback.  

Grocery Goods Rise

Food and consumer goods makers have been announcing price increases on a broad range of products.

Kraft Heinz said in a recent letter to its customers that it will raise prices in March on dozens of products, including Oscar Mayer cold cuts, hot dogs, sausages, bacon, Velveeta cheese, Maxwell House coffee, TGIF frozen chicken wings, Kool-Aid and Capri Sun drinks.

The increases range from 6.6% on 12oz Velveeta Fresh Packs to 30% on a three-pack of Oscar Mayer turkey bacon. Most cold cuts and beef hot dogs will go up around 10% and coffee around 5%. Some Kool-Aid and Capri Sun drink packs will increase by about 20%.

"As we enter 2022, inflation continues to dramatically impact the economy," Kraft Heinz said in a letter dated January 24 to at least one of its wholesale customers that was viewed by CNN Business. The wholesaler shared the letter on the condition of anonymity to protect the company's relationship with its suppliers.

Kraft Heinz is the latest consumer manufacturer to announce plans to boost prices early in the year. Last week, Procter & Gamble said that it was raising prices for its retail customers by an average of about 8% in February on Tide and Gain laundry detergents, Downy fabric softener and Bounce dryer sheets. Conagra, which makes such brands as Slim Jim, Marie Callender's and Birds Eye, recently said it will raise prices later this year as well.

If retailers decide to pass on any of the increased costs, these items will be more expensive for shoppers in stores. US consumer prices rose 7% annually in December, the steepest climb in 39 years.

Higher inflation seems to be baked in to 2022, so it may not be until 2023 until we see inflation begin to moderate. We think the Fed will end up raising rates faster than the market is predicting.

Southwest Says Worst of Omicron is Over

Southwest made a profit last quarter and acknowledged that Omicron has harmed the start of 2022. But they are optimistic that the worst of Omicron is over.

But Southwest said the Omicron variant will likely derail its previous expectation for a profitable start to 2022. The new variant has slowed both leisure and business travel, and Southwest expects that to reduce operating revenue by $330 million in January and February.

Adding to the variant’s price tag, Southwest said staffing woes when many employees were out sick earlier this year—combined with bad weather—led to 5,600 flight cancellations so far in January. The company said that is expected to reduce operating revenue by $50 million for the month, which will show up in first-quarter earnings.

Like other airlines, Southwest said bookings have started to recover—it expects to shake off Omicron’s impact and to stop losing money again in March. The airline said it still expects to be profitable in 2022 as a whole.

“With Covid-19 cases trending downward, the worst appears to be behind us, and we are optimistic about current bookings and revenue trends for March 2022,” said Bob Jordan, who is set to take over as chief executive officer next week.

While the daily average of COVID cases is at 618,000, it is down 21% of a 14-day period. In Europe, the Omicron surge hit earlier and countries like the UK and Denmark are eliminating most COVID restrictions. Earlier this month, I attended the CREFC conference in Miami, and only about 25% of the paid attendees actually attended, so it is still impacting business travel. I am attending another conference next week, so it will be interesting to see the strength of the turnout.

Puerto Rico BK Over

Puerto Rico is expected to emerge from bankruptcy shortly, ending the biggest municipal bankruptcy ever.  

1. How big was Puerto Rico’s bankruptcy?

The debt restructuring -- an agreement between Puerto Rico’s government, bondholders, insurance companies, vendors and labor groups -- will erase $33 billion of debt and other obligations, including the cutting of $22 billion of bonds to $7.4 billion. It surpasses Detroit’s $18 billion bankruptcy in 2014, previously the largest. When Puerto Rico’s governor announced in 2015 that the commonwealth, a Caribbean island that is a U.S. territory, could not repay what it owed, the debt of the government and the agencies and authorities it controlled totaled $74 billion. 

2. What did the judge decide?

U.S. District Court Judge Laura Taylor Swain agreed to the restructuring plan, including the issuance of new bonds that will reduce Puerto Rico’s outstanding debt. She also rejected assertions by some creditors that a federal law, called Promesa, that was passed to allow Puerto Rico to restructure its obligations through U.S. court oversight violates the Constitution. The agreement she approved also avoids cuts to pension benefits for islanders and establishes a new pension reserve trust; Puerto Rico’s depleted retirement fund owes an estimated $55 billion to current and future retirees.

3. How will the debt restructuring work?

Puerto Rico’s government and the financial oversight board created by Promesa to manage its bankruptcy process plan to execute a debt exchange on or before March 15. At that time anyone holding a Puerto Rico general obligation bond or commonwealth-guaranteed debt will swap their securities for new restructured general obligations. This will facilitate the reduction in principal to lower Puerto Rico’s debt load.

4. What are bondholders getting?

The new bonds will give investors as little as 67.7 cents on the dollar to as much as 80.3 cents on their current holdings, depending on the type of bond they bought and when it was sold. They will also receive a $7 billion cash payment and a so-called contingent value instrument that pays out if Puerto Rico’s sales-tax collections exceed projections.

Wiping out $33 billion in debt is an extraordinary step, and the recovery from the bondholders seems consistent with other municipal restructurings. Bondholders in the Detroit bankruptcy received 74% on the dollar, for example. Just like Detroit rebounded after its bankruptcy, Puerto Rico is seeing a surge in investment due to some rules to encourage migration. While bankruptcy should be a last resort, other strained municipalities will certainly look at it more favorably.

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