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NEW YORK — If you were planning on buying a house or refinancing to take advantage of record low mortgage rates: Think again.

Mortgage rates at some lenders spiked by as much as 1 percent Wednesday and saw little relief on Thursday, according to mortgage brokers. April’s record lows in mortgage rates may have come and gone.

That’s a big downer for people like Roger Wald, who recently discovered he would save $25,000 a year if he refinanced his five-year mortgage at 4.75 percent. Wald, an auto body repairman in Sarasota, Fla., could have gotten that rate last month.

But like many homeowners, he waited for rates to fall further. Now, he’s worried he missed his chance.

"The 4.75 percent my broker quoted two weeks ago? There’s no way I’m going to get that now," said Wald, 49.

Of bigger concern is the effect rising mortgage rates could have on the nascent economic recovery. The stock market has rallied since early March on the assumption the recession will end this year. Federal Reserve Chairman Ben Bernanke has been calling early signs of economic stabilization "green shoots" — and one of those shoots was a pickup in refinancing activity caused by tumbling mortgage rates.

But mortgage rates have rebounded sharply over the past few days as the nation’s growing debt raises concerns that government-backed assets could lose some of their value.

Loan officer Dan Green has been around the mortgage business for six years, but he can’t remember watching a move in interest rates like the spike that took place on Wednesday.

In the space of 90 minutes, he said, rates on a 30-year fixed mortgage jumped about five-eighths of a point, hiking the annual cost of a $300,000 loan by more than $1,000.

"So far, the reaction has been immediate," said Green, a Cincinnati-based agent for Chicago’s Mobium Mortgage Group Inc. "I had people who had refi options Tuesday morning that didn’t have them on Wednesday."

It’s a trend that could slow both refinancing and home buying if it continues, threatening the larger economy. Home sales generally generate jobs tied to construction and manufacturing of household items, such as furniture and appliances. And if existing homeowners refinance, it could free up more cash to be used for consumer purchases payday loans.

Analysts say higher mortgage rates won’t necessarily derail the economy’s recovery, but it certainly won’t help.

"If the Fed does not step in, you are going to see the ‘green shoots’ get frost bite," said T.J. Marta, founder of financial research firm Marta on the Markets.

The average rate for a 30-year fixed mortgage is back at 4.91 percent this week, up from 4.82 percent last week, Freddie Mac said Thursday.

The 30-year fixed mortgage rate hit a record low of 4.78 percent in April thanks in large part to the Fed’s decision this year to buy as much as $1.25 trillion in mortgage securities and $300 billion in Treasury notes.

Lower rates led to a surge in mortgage applications. Applications rose for five straight weeks between early March and early April, according to the Mortgage Bankers Association. And sales of both existing and new homes ticked higher from March to April.

The Fed’s moves, however, have recently lost their effectiveness in the market. The yields on the 10-year and 30-year Treasury notes have surged to a six-month high and are nearly where they were a year ago. That’s significant because Treasury yields, or their annual rates of return, help set mortgage rates.

Mortgage activity is already starting to decline. Mortgage applications tumbled 14 percent in the week ended May 22 from the previous week, the Mortgage Bankers Association said Wednesday. Applications to refinance a loan were down almost 19 percent.

The Fed has many tools to bring rates down again. It could increase how much it intends to spend on Treasury purchases or mortgage-backed securities. It could also decide to simply buy longer-dated Treasurys, said David Ader, government bond strategist at RBS Greenwich Capital. Recently, the Fed has been focusing on buying shorter-term government debt.

But if the Fed buys more Treasurys, some investors worry the central bank’s moves could have unintended consequences. That’s because when the Fed buys the debt that the government issues, it is essentially creating money. And that can cause inflation and weaken the value of the dollar against other major currencies.

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Sales of newly constructed homes were almost flat in April — but in a sickly housing market, economists saw a few reasons for hope.

The Commerce Department said new home sales ticked up 0.3% last month to a seasonally adjusted annual rate of 352,000. That was from a downwardly revised reading of 351,000 in March.

Analysts were looking for the rate of new home sales to rise to 360,000, according to a consensus estimate of economists compiled by Briefing.com.

"We aren’t seeing a huge upswing in market conditions. But we aren’t seeing things fall apart again, either," said Mike Larson, real estate and interest rate analyst at Weiss Research, in a research note.

New home sales — which have plunged as builders struggle to construct homes to compete with drastically cheapened foreclosure properties — were 34% below the same month a year ago, when they estimate stood at a 533,000 annual rate.

The median sales price of new homes rose to $209,700 in April, up nearly 4% from a revised median home price of $202,200. That was still 14.9% behind the median price of $246,400 the same month a year ago. The average sales price was $254,000, down 1% from a revised $257,100 in March.

Inventory reduced: Drastically reduced prices have lured in enough buyers to start chipping away at the glut of inventory that has been weighing down the market. At the end of April, the seasonally adjusted estimate of new homes for sale was 297,000, or a 10.1 month supply at the current sales rate. In January, there was a revised 12.4 months of supply on the market.

"Inventory levels continued to improve and broke through 300,000 for the first time since 2001," said Adam York, economist at Wachovia, in a research note. "We are encouraged by the relative stability in sales and the continued improvement in inventory levels installment payday loans."

Plunging mortgage rates also served to attract buyers into the market. But as Treasury yields have risen recently, so have mortgage rates. According to a weekly survey from Bankrate.com, the 30-year fixed mortgage rates rose to 5.45% in the week ended Wednesday, up from 5.24% in the prior week.

However, last week’s rate was still significantly below the 6.20% of a year ago, and the historically low rates could continue to bring buyers, according to one economist.

"We still think the combination of very low mortgage rates and falling inventory will entice people back into the market in greater numbers over the next few months," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a research note.

But he called the April sales rate "a bit disappointing, given the hefty increase in homebuilder sentiment in the past couple of months."

Slow and steady: Going forward, if indeed the worst is over, economists say improvement will be slow and steady.

"Looking back, January may turn out to have been the bottom in new home sales," said Wachovia’s York. "We do not expect a major pick-up in the near term, but stability over the summer would not be a surprise."

Even with home inventory levels shrinking and home prices attracting new buyers, "there is no evidence whatsoever of a renewed housing boom — just a gradual increase in activity in some markets, brought about by lower prices, lower mortgage rates, and tax and builder incentives," said Weiss’ Larson. 

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It looks like after two months of ignoring the risks that remain for the economy and markets, Wall Street has finally found something else to worry about: the possibility that the United States could lose its AAA credit rating.

Thursday was one of those rare days when stocks, bonds and the dollar all fell. Stocks recovered slightly Friday morning ahead of the Memorial Day weekend, but Treasurys and the greenback were lower again.

The sell-off was partly sparked by Thursday’s news that rating agency Standard & Poor’s had decided to place the sovereign rating of the United Kingdom on "negative watch."

S&P did not actually downgrade the United Kingdom. Like the United States, it still has an AAA rating, the highest that a country, municipality or corporation can have.

Nonetheless, the move was viewed as a precursor to an eventual downgrade. And investors went one step further to assume that if Britain was being put on notice, then the "colonies" might be next.

White House spokesman Robert Gibbs said Friday that the Obama administration was "not concerned about a change in our credit rating."

But downgrade fears were heightened because the highly respected bond guru Bill Gross, who manages the Pimco Total Return fund, said in published reports that the United States could lose its AAA rating in a few years, if not before then.

If that actually happens, watch out.

For one, it would likely lead to higher interest rates across the board in the United States since a credit downgrade makes it more expensive for the borrower to issue new debt. It’s not different than trying to get an attractive mortgage or credit card rate after taking a hit to your FICO score.

It would also be a huge psychological blow to the nation, and possibly lead to a further dip in investor sentiment. It has always been widely assumed that the United States would never lose its pristine credit rating.

Talkback: Should the U.S. lose its AAA credit rating? Leave your comments at the bottom of this story.

Even in the midst of this recession, many investors have continued to view the U.S. dollar and Treasury notes as safe havens, or at the very least, safer havens, than other assets. That might no longer be the case if the United States has its rating cut.

But let’s take a step back. While I do think it’s about time that investors woke up after this heady two-month rally and realized that not every bit of potential bad news is factored into the market (General Motors (GM, Fortune 500) filing for bankruptcy? No problem!), worrying about an imminent credit downgrade for the United States is probably premature.

Hard to default when you can print money

Jack Ablin, chief investment strategist with Harris Private Bank in Chicago, points out that even though the government’s rising debt is a concern, it’s not as if the United States is at risk for defaulting on its financial obligations.

"Any concern about an impending U.S. downgrade is probably way overblown," Ablin said "As long as our debt is denominated in dollars, the U.S. will be able to make the payments. We print the money."

If anything, Ablin said investors should worry more about the impact that more debt will have on the U.S. dollar, which has weakened as of late, and not the country’s credit rating.

What’s more, the notion that the U.S. could eventually lose its credit rating isn’t really new news. It’s been discussed for months. It’s no secret that if the government’s debt burden rises further and becomes even more burdensome, the credit rating agencies may be forced to take action.

In a report on May 9, S&P rival Moody’s reaffirmed its stable rating on the United States but warned that "if the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure car insurance companies."

Still, one economist thinks that it would be a mistake for the rating agencies to downgrade the U.S. just because of rising debt loads. That’s because the credit ratings should not really reflect whether or not a nation has too much debt, but if default is a risk.

"It’s true that the long-term budget outlook is deteriorating and that is a cause for concern," said Zach Pandl, economist with Nomura Securities. "Those problems should be addressed by policymakers. But the chances that the U.S. will default on dollar-denominated debt is almost zero."

Agencies trying to regain investors’ trust

But the ratings agencies may be eager to prove to investors that they have teeth.

S&P, Moody’s and other credit rating firms have been lambasted by many for not acting sooner to warn investors about the risks posed by subprime mortgages and other "toxic" assets that helped sow the seeds for the recession and credit meltdown.

"These agencies are certainly on their heels. There is no doubt about that. The level of confidence in credit ratings has been diluted," said Ablin.

So the credit rating firms have something to prove and they have been acting tougher in recent months. Several of them downgraded companies that previously had AAA ratings, including General Electric (GE, Fortune 500), Warren Buffett’s Berkshire Hathaway (BRKA, Fortune 500) and Toyota Motor (TM). Before this crisis, it would have been unthinkable that any of those firms would have their ratings cut.

Now don’t get me wrong. It’s good that the ratings agencies are looking to be more proactive than reactive. And this is not to dismiss the many problems that the U.S. economy still faces. But of the many things left to still worry about, a credit rating downgrade should be at the bottom of the list.

After all, even though there has been a sell-off in bonds that has pushed long-term rates higher lately, the yield on the U.S. 10-year Treasury is still at a relatively low 3.4%. (Bond prices and yields move in opposite directions.)

Mike O’Rourke, chief market strategist with BTIG, an institutional brokerage firm, said if investors really are worried that the United States will have its credit rating lowered, then Treasury rates will go much higher from here. And he doesn’t see that happening.

"If the 10-year yield was at 4.5 % to 5%, I would be more concerned. But we’re barely off multi-decade lows," O’Rourke said. "The market is still indicating there is tremendous demand for U.S. Treasurys."

Talkback update: Greetings Buzz readers. There is a new way to post comments for this column. If you have a Facebook account, you can submit your feedback using the Facebook Connect feature that will appear at the bottom of the page. If you don’t have one, it is free to sign up.

The good news is that reader comments will now appear immediately and on the same page as the column as opposed to a separate page. I trust that loyal Buzz readers will continue to actively share their thoughts with this new feature. And rest assured, I will still be using the best reader reaction as fodder for video installments of The Buzz.

So with that in mind, here is today’s question for readers. Should the U.S. lose its AAA credit rating? 

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General Motors Corp moved closer to filing the largest bankruptcy ever for a U.S. industrial company after a crucial bond exchange proposal failed, while the fate of GM’s European brand Opel remained uncertain after marathon talks with German officials ended without a deal.

At the same time, bankrupt U.S. automaker Chrysler faced a key court hearing expected to clear the way for Fiat SpA to take control of its best assets on the fast-track schedule set by President Barack Obama’s administration.

Less than a month after it filed Chapter 11, Chrysler is seeking approval to sell its stronger operations to a “New Chrysler” owned by Fiat, labor unions and the U.S. and Canadian governments, in exchange for $2 billion paid to lenders.

The court hearing into the Chrysler sale is set to continue Thursday in New York.

With the Chrysler case nearing conclusion, attention was shifting to the complications expected from GM’s bankruptcy — expected within the next few days — and the sale of Opel.

Fiat is also in the race to win control of Opel, part of Chief Executive Sergio Marchionne’s ambitious attempt to build an automotive alliance that could rank as the world’s second-largest by sales behind Japan’s Toyota Motor Corp.

The bidding battle for Opel had narrowed to a two-way race between Fiat and Canadian auto parts company Magna International Inc, German ministers said after more than 12 hours of talks stretching well into Thursday morning paydayadvance.

Belgium-listed holding RHJ International SA and China’s Beijing Automotive Industry Corp had also submitted bids.

But ministers said they had been unable to reach a deal to provide Opel with temporary financing if GM files for bankruptcy in the United States.

“We have made demands on the U.S. Treasury and expect answers by Friday and we will need these answers in order to agree a plan,” Economy Minister Karl-Theodor zu Guttenberg said. “We don’t have the security yet that we need to commit to bridge financing today.”

Finance Minister Peer Steinbrueck spoke of “surprises and disappointment” with the U.S. negotiators, saying GM had shocked participants by announcing it needed 300 million euros ($415 million) more in short-term cash.

BOND DEAL FLOPS

Selling off its Opel business was identified as a major priority by GM as it neared the end of this month. The bond exchange was another.

GM said in a statement that an offer to exchange $27 billion in bond debt for a 10 percent stake in a reorganized company by a midnight deadline had fallen far short of the target set in consultation with the Obama administration.

GM said in a release that “substantially less” than the 90 percent threshold had been tendered and none of the exchange offers would be accepted. 

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Canadian first-time home buyers are a cautious lot, but they will strike if the price is right.

While the economy remains a huge concern, lower prices and interest rates are spurring them to buy in the spring market, according to a report released yesterday by Royal LePage Real Estate Services.

According to a poll by Pollara Research, done for Royal LePage, 86 per cent of Canadians say lower interest rates make them more likely to buy a home. Eighty-one per cent say lower prices are another motivating factor.

But the economy remains a stumbling block, with 76 per cent citing job security and 64 per cent saying a stable economy are important factors in their buying decisions.

"The true impact of job loss is understated because, beyond the 8 per cent unemployment rate, you have a section of the population who are concerned about their jobs, and that is feeding into their choice to buy a home," Royal LePage CEO Phil Soper said in an interview.

Still, some buyers have returned to the market this spring. A first-time homebuyer’s tax credit and a home-renovation tax credit for 2009 have been cited by potential purchasers as influencing factors.

First-time buyers are key to the market because they allow move-up buyers to sell their homes while continuing up the housing chain to more expensive properties.

"The proof in the pudding will be whether we see if demand is sustainable to summer and early fall," Soper said.

So far, Canadian developers have avoided a disastrous spring, with new-home sales down by 26 per cent in April compared with last year, representing the slowest deceleration in six months. Sales totalled 1,880 in April, compared with 2,541 the year before, according to figures released yesterday by the Building, Industry and Land Development association.

Still, year-to-date sales are down by 52 per cent compared with 2008.

Toronto existing-home prices have also been surprisingly resilient, down by less than 1 per cent from the same period last May fastcash.

By contrast, in the United States, the Case-Shiller housing price index reported yesterday that homes have now lost an incredible 32.2 per cent in value since the correction.

In the Toronto market, condominiums remain the preferred choice of many first-time buyers based on affordability.

Some buyers are gravitating to condos built within the past five years, "questioning the viability of new build projects within the current economic climate," LePage said, as some buyers worry that some projects will not be started due to poor sales.

The typical first-time buyer is 25 to 30 and willing to spend up to $400,000 on a home for couples. Singles, mostly women, are purchasing within the $250,000 to $300,000 range according to the real estate company.

Developers say new projects are still selling, but there is uncertainty in the market over a proposed harmonized sales tax in Ontario, which would meld the GST and PST and push up the prices of homes selling for more than $400,000. Builders say the new tax could bump up costs by as much as 6 per cent on sales in a given project, making some developments unfeasible.

"We have a situation where I have no idea what to tell my customers if they are going to get hit with the tax," said Frank Giannone, president of the Ontario Home Builders’ Association in a meeting this week with the Star’s editorial board.

Giannone said he is about to launch a development in Don Mills, but uncertainty over the tax is causing buyers to hesitate.

The builders’ group wants the province to give an exemption to buyers signing sales deals before next July, when the tax is to be implemented. Under the proposed tax, homes under $400,000 are exempt from the tax, while homes between $400,000 and $500,000 will pay a portion. Homes over $500,000 bear the full brunt.

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Boeing Co. leaders say that the U.S. military’s airlift needs are growing and that a Pentagon proposal to halt future orders for the C-17 Globemaster III cargo plane is premature.

Boeing, whose defense unit is headquartered in St. Louis, is trying to rally support for the C-17 on multiple fronts — arguing that ceasing production would erode the U.S. industrial base, costing thousands of jobs at Boeing plants and those of its main suppliers. But Boeing officials also emphasize the plane’s strategic value.

"Right now, since 9/11, the airplane has been flying at about a 15 percent higher rate than was anticipated," said Donald A. Anderson, Boeing’s C-17 program manager in St. Louis. "In addition, they’re talking about rebasing troops in the United States. They’re talking about an increase in the size of the Marines Corps and the Army.

"So it seems like the airlift requirements are growing. And you need airlifters to meet those needs."
Starting with Secretary of Defense Robert Gates’ announcement in early April and continuing through last week, the Pentagon has said it can get by with the 205 C-17s that are either in service or on order. The Air Force also uses the Lockheed Martin C-5 Galaxy to transport weapon systems, cargo and personnel to overseas locations.

Republican Sen. Christopher "Kit" Bond and Democratic Sen. Claire McCaskill, both of Missouri, have written letters supporting more orders of the C-17, and Machinists Union officials have traveled to Washington to show their support for a program that supports 900 jobs in St. Louis.

"This is high political theater," said analyst Richard Aboulafia of The Teal Group in Fairfax, Va. "The bottom line is I don’t think the line is threatened. But it is up to everybody from Department of Defense to Congress to Boeing to the unions to make it look as though it were."

The Defense Department has not sought funding for the C-17 in the last three years. But Congress has stepped in to add funding for more of the $202 million planes through supplemental defense appropriations bills.

Bond and Boeing officials have asked why Gates would halt C-17 orders while there is a study under way into the military’s future air-mobility needs. The results are expected this fall.

"But yet we’re making that decision now to stop the airplane," Anderson said. "So it seems somewhat premature fast payday loans."

Bond said shutting down production of the C-17 is a "dangerous gamble" and warned that the U.S. can’t afford to "lose the capability to transport safely our troops and equipment to anywhere in the world."

In a letter to President Barack Obama, McCaskill said the U.S. is "literally flying the wings off these planes," and added "this is not the time to end its production, especially in light of projected global mission sets for the U.S. military."

Both legislators also have gone to bat for Boeing’s St. Louis-built F/A-18 Super Hornet, whose future was placed in limbo under the latest Pentagon spending plan.

The C-17 is assembled at a plant in Long Beach, Calif. But the cargo door, cargo ramp, landing-gear pods, nose and engine pylons are built in St. Louis.

A November 2008 report by the Government Accountability Office recommended "careful planning to avoid shutting down the C-17 line prematurely." Both Boeing and the Air Force believe shutting down and restarting production "would not be feasible or cost effective," the report found.

The GAO cited the high costs of hiring and training a new work force, reinstalling equipment to proper working condition and re-establishing a supplier base.

Boeing has delivered the C-17 to other countries, including Australia, Canada and the United Kingdom. The United Arab Emirates has announced its intent to buy four of the planes, and Qatar has ordered two and exercised an option on two additional C-17s.

But Anderson said international sales alone are not enough to sustain the C-17 line. Boeing officials say maintaining C-17 sales to the U.S. Air Force is necessary to keep the price of the planes competitive in the international market.

Defense analyst Loren Thompson of the Lexington Institute in Arlington, Va., said the C-17 is the best strategic airlifter ever built and "a very cogent case" can be made that terminating production at 205 planes would be too early. At the moment, he said, its future will be dictated by Congress.

"Here’s the bottom line to C-17," Thompson said. "If Congress doesn’t add money, there won’t be any more."

Source

Boeing Co. leaders say that the U.S. military’s airlift needs are growing and that a Pentagon proposal to halt future orders for the C-17 Globemaster III cargo plane is premature.

Boeing, whose defense unit is headquartered in St. Louis, is trying to rally support for the C-17 on multiple fronts — arguing that ceasing production would erode the U.S. industrial base, costing thousands of jobs at Boeing plants and those of its main suppliers. But Boeing officials also emphasize the plane’s strategic value.

"Right now, since 9/11, the airplane has been flying at about a 15 percent higher rate than was anticipated," said Donald A. Anderson, Boeing’s C-17 program manager in St. Louis. "In addition, they’re talking about rebasing troops in the United States. They’re talking about an increase in the size of the Marines Corps and the Army.

"So it seems like the airlift requirements are growing. And you need airlifters to meet those needs."

Starting with Secretary of Defense Robert Gates’ announcement in early April and continuing through last week, the Pentagon has said it can get by with the 205 C-17s that are either in service or on order. The Air Force also uses the Lockheed Martin C-5 Galaxy to transport weapon systems, cargo and personnel to overseas locations.

Republican Sen. Christopher "Kit" Bond and Democratic Sen. Claire McCaskill, both of Missouri, have written letters supporting more orders of the C-17, and Machinists Union officials have traveled to Washington to show their support for a program that supports 900 jobs in St. Louis.

"This is high political theater," said analyst Richard Aboulafia of The Teal Group in Fairfax, Va. "The bottom line is I don’t think the line is threatened. But it is up to everybody from Department of Defense to Congress to Boeing to the unions to make it look as though it were."

The Defense Department has not sought funding for the C-17 in the last three years. But Congress has stepped in to add funding for more of the $202 million planes through supplemental defense appropriations bills.

Bond and Boeing officials have asked why Gates would halt C-17 orders while there is a study under way into the military’s future air-mobility needs. The results are expected this fall.

"But yet we’re making that decision now to stop the airplane," Anderson said. "So it seems somewhat premature freecreditscore."

Bond said shutting down production of the C-17 is a "dangerous gamble" and warned that the U.S. can’t afford to "lose the capability to transport safely our troops and equipment to anywhere in the world."

In a letter to President Barack Obama, McCaskill said the U.S. is "literally flying the wings off these planes," and added "this is not the time to end its production, especially in light of projected global mission sets for the U.S. military."

Both legislators also have gone to bat for Boeing’s St. Louis-built F/A-18 Super Hornet, whose future was placed in limbo under the latest Pentagon spending plan.

The C-17 is assembled at a plant in Long Beach, Calif. But the cargo door, cargo ramp, landing-gear pods, nose and engine pylons are built in St. Louis.

A November 2008 report by the Government Accountability Office recommended "careful planning to avoid shutting down the C-17 line prematurely." Both Boeing and the Air Force believe shutting down and restarting production "would not be feasible or cost effective," the report found.

The GAO cited the high costs of hiring and training a new work force, reinstalling equipment to proper working condition and re-establishing a supplier base.

Boeing has delivered the C-17 to other countries, including Australia, Canada and the United Kingdom. The United Arab Emirates has announced its intent to buy four of the planes, and Qatar has ordered two and exercised an option on two additional C-17s.

But Anderson said international sales alone are not enough to sustain the C-17 line. Boeing officials say maintaining C-17 sales to the U.S. Air Force is necessary to keep the price of the planes competitive in the international market.

Defense analyst Loren Thompson of the Lexington Institute in Arlington, Va., said the C-17 is the best strategic airlifter ever built and "a very cogent case" can be made that terminating production at 205 planes would be too early. At the moment, he said, its future will be dictated by Congress.

"Here’s the bottom line to C-17," Thompson said. "If Congress doesn’t add money, there won’t be any more."

Source

The Federal Reserve is likely to keep benchmark interest rates near zero for a while in an economy that is pulling out of a steep decline and appears on course for a very gradual recovery, Fed Vice Chairman Donald Kohn said on Saturday.

“The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households,” Kohn told a conference at Princeton University.

“As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate,” he said, referring to the Fed’s policy-setting Federal Open Market Committee.

The central bank has cut interest rates to near zero and committed to massive lending and securities purchases to heal shattered financial markets and pull the economy out of the longest recession since the Great Depression.

Kohn said that in spite of the fragile state of the U.S. economy and the prospect for low rates for a while, the Fed must make plain its plans to pull back its lending when a recovery begins to take hold.

“To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures,” he said.

The Fed has said it is willing to expand extensive purchases of mortgage-related and longer-term Treasury securities to support any nascent recovery.

“The preliminary evidence suggests that our program so far has worked,” Kohn said referring to the commitments to buy securities to date cash advance loans. He said he believes they have held down long term interest rates by as much as 1 percentage point.

An analyst said Kohn’s remarks are a signal the Fed is ready to buy more longer-term securities.

“Kohn’s comments today on the effects of these actions are the most supportive to date of any Fed official and they increase the likelihood that the FOMC will extend or expand the existing asset purchase programs,” JPMorgan Economics economist Michael Feroli wrote in a note to clients.

Kohn said government spending is likely to have a more powerful effect in helping pull the economy out of recession now — with interest rates near zero — than it would if the Fed were still in a position to lower interest rates further.

“In this situation, fiscal stimulus could lead to a considerably smaller increase in long-term interest rates and the foreign exchange value of the dollar, and to smaller decreases in asset prices, than under more normal circumstances,” he added.

PRODUCTIVITY EYED

The Fed is studying how the current crisis may have affected U.S. economic productivity and how those changes may have affected the difference between how the economy grows and its full potential, he said.

“The effect of the crisis, the shifting of labor across markets, the effects on productivity have been very much one of the topics at the Fed,” Kohn said in response to questions speaking. 

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A sign that jobs likely will remain scarce through next year emerged Thursday in a report showing a record number of Americans receiving unemployment aid.

And plant shutdowns by Chrysler and General Motors could further harm the economy in coming months. Economists are just starting to assess the full impact of the auto industry’s woes, which affect thousands of suppliers and dealers.

The number of people who are continuing to receive jobless benefits rose to nearly 6.7 million from about 6.6 million, the Labor Department said. That’s the highest total on records dating to 1967 and the 16th straight weekly record.

New jobless claims fell to a seasonally adjusted 631,000 last week, down from a revised figure of 643,000 the previous week. First-time claims, which had dropped to 605,000 earlier this month, reflect the pace of layoffs.

Factory closings by Chrysler and GM, most of them temporary, probably will boost the number of claims into the summer, economists said. The closings also are likely to cause layoffs at the nation’s 5,000 auto suppliers, which employ about 3 million workers.

Even with the auto industry’s woes, many analysts expect the economy to recover and start growing slightly by the fall.

Abiel Reinhart, an economist at JPMorgan Chase & Co., said the auto sector "won’t be a big enough drag to really change the big picture," particularly since many of the layoffs are temporary personal health insurance.

But economists also acknowledged uncertainty about the impact.

Joel Naroff, president of Naroff Economic Advisors, said the most critical decisions will come after the temporary shutdowns.

Namely: Will GM and Chrysler ramp up production or hold back?

Overall, while the pace of layoffs may slow, hiring remains weak, and the unemployment rate will keep rising, economists said. Based on Thursday’s data, Reinhart predicts the jobless rate could hit 9.2 percent or higher this month, up from 8.9 percent last month.

But the economic news was not all bad. In a separate report, a private research’s group forecast of economic activity rose more than expected last month. It was the first gain in seven months.

And the Conference Board says its index of leading economic indicators rose 1 percent last month. Economists surveyed by Thomson Reuters had expected a 0.8 percent increase in the index, which is designed to forecast economic activity in the next three to six months.

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The vision that developer Paul McKee has for re-creating north St. Louis is massive indeed.

Four and a half million square feet of new office buildings and stores, stretching from downtown to Natural Bridge Road to the Mississippi. Ten thousand new homes.

New streets and sewers. Parks and a trolley line. Even its own power grid.

This is what McKee envisions over the next 15 years across roughly 500 acres on the city’s north side. Nothing less than a wholesale rebirth of a swath of St. Louis that hasn’t seen much new life in decades.

"If our city is going to be great again," McKee said, "it’s got to come from here."

The developer, head of McEagle Properties, sat down with the Post-Dispatch on Wednesday and laid out some of his ideas for the land, which his company has spent five years and $46 million secretly and not so secretly assembling.

It was McKee’s most public discussion yet of his goals, and comes a week before he intends to ask the city to provide "hundreds of millions" of dollars in financing to get the project off the ground.

All told, the price tag for NorthSide, as it’s called, would run well into the billions — McEagle estimates nearly $5.4 billion in assets created — and would need a big chunk of public money. McKee said he and his partners will seek at least $1.1 billion in aid from the city, state and federal governments.

McEagle’s goal, McKee said, is to build four "job creation centers" — office buildings, stores and light industry — and massively upgrade the neighborhood’s run-down infrastructure. McEagle wants to partner with residential developers to create urban-style, mixed-income housing across other vacant land in the area.

It’s an ambitious plan that comes during the deepest recession in decades, and will likely need a huge infusion of federal stimulus dollars. It also hinges on the success of several other major projects, including the new, $640 million Mississippi River Bridge, and will have to overcome the residue of five years of neighborhood suspicion over McKee’s north city land grab.

The key to it all, McKee said, is bringing in jobs. He envisions 22,000 permanent jobs and 43,000 to build it.

McKee cited his company’s regional successes as proof that his NorthSide plan can be achieved. McEagle helped bring MasterCard and its 2,500 employees to WingHaven, its O’Fallon, Mo., development. And the company’s NorthPark project in north St. Louis County houses the corporate headquarters of Express Scripts, with 1,000 workers. His company, he said, knows how to land big employers.

"We don’t think you can steal these jobs from Clayton or St. Charles or St. Clair County," he said. "We’ve got to create new growth."

One potential source, McKee said, is the ongoing talks with Chinese officials about an air cargo hub and other investment in St. Louis — talks he helped launch. Yet he acknowledged that the three companies most interested in moving to NorthSide are already in the St. Louis area. He declined to name the companies.

But right now, funding the project is the biggest hurdle.

McKee said he has spent $46 million of his own money on it so far. And in December he reached a financing agreement with the Bank of Washington for about $165 million, according to mortgage documents filed with the city. Otherwise, there’s no private money yet.

"I don’t have people standing in line, whether bankers or developers, to help us on this," McKee said.

So while he waits for that, he’s pushing for public help.

McEagle wants to use as much as possible of the $95 million in tax credits Missouri legislators created in 2007 for assembling distressed land, he said. It will apply, likely next week, for tax-increment financing from the city worth "hundreds of millions of dollars." McEagle plans to buy city-owned property and swap land with the Missouri Department of Transportation and other public agencies. And McKee said he’s working with area senators and congressmen to steer stimulus dollars to the project.

Several pieces of the project fit nicely with the priorities President Barack Obama has set for stimulus spending. Among them:

— Completely rebuilt sidewalks and streets, some with medians and bike lanes; separation of storm and sanitary sewer systems; new parks and green space; and better stormwater collection systems 24 hour payday advances.

— Plans being discussed with MoDOT to reconfigure the intersection of Highway 40 (Interstate 64) at 22nd Street to ease access to north St. Louis and to rework the off-ramp of the planned Mississippi River Bridge to feed directly into Tucker Boulevard.

— Co-generation power plants and renewable energy sources to power neighborhoods across the site.

— New parks, police and fire stations, community centers and an in-ground trolley line to circle the neighborhood and connect it with MetroLink.

It’s a lot of public money, but it’s the kind of investment that government should be making, said Richard Ward, a longtime economic development consultant in St. Louis and vice president of Zimmer Real Estate Services.

"There’s no reason to think that this kind of endeavor would not involve public money," he said. "If anything should and would require a partnership with the public sector, it’s this. It’s the fundamental regeneration of an entire sector of the city."

The plan is a huge opportunity for St. Louis, said Jeff Rainford, a top aide to Mayor Francis Slay. It’s "like nothing that anybody else has ever come up with," he said, and it’s worth a shot.

But, Rainford warned, McKee’s idea is a long way from a detailed plan. And it will need complete community buy-in if he wants City Hall’s support.

State highway officials said they met with McEagle several months ago and that engineers have reviewed the proposed 22nd Street interchange. But nothing has been approved, and there’s no money set aside to build it, said MoDOT director Pete Rahn.

"We have not had a formal proposal," Rahn said. "Until we have something like that, it is difficult to respond."

Any land swap would have to be "value for value," Rahn said, and fit within the state’s transportation plan.

The energy piece of the plan fits well with AmerenUE’s long-term goals for efficiency and use of renewable sources, said Steve Kidwell, the utility’s vice president for regulatory affairs, and the company will consider providing financing to help get the projects started.

"We see some really innovative and interesting ideas here," Kidwell said.

Ameren hasn’t yet decided if it will apply for stimulus money, which includes billions for energy efficiency programs, or if it will partner with McEagle for those dollars, Kidwell said.

McEagle also must assuage the concerns of neighborhood residents, who have watched with suspicion as the company has bought up more than 900 properties, many of which have fallen into decay. Parts of Old North St. Louis, where some rehabbing has already taken place and where residents were vocal in their concerns about McKee, were left out of the plan.

McKee said he plans to use eminent domain very sparingly — only a handful of homes are in the planned "job-creation areas," and the distressed-area tax credits can’t be used on eminent domain property — and will "reuse, retain and maintain every building that can be saved."

McKee also said he’s sorry for the secrecy around the project these past five years, as he bought up property without saying what he was doing. He said he was just trying to keep prices in check.

"If there’s anything to apologize for, it’s that," he said. "But I didn’t know how else to collect all this land."

McKee has met in small groups with some neighborhood residents, but he plans to attend a community meeting tonight and address them in full for the first time. He wants their input, he said, and their help, to fill in the crucial details that will make the big vision into a reality.

"This is the beginning of a 15-year process," he said. "It’s a vision. Not a plan. We’re a long way from the finished product."

Jake Wagman and Ken Leiser of the Post-Dispatch contributed to this report.

GRAPHIC:
Developer Paul McKee’s concept for remaking north St. Louis includes new homes,
infrastructure, stores and office buildings over 500 acres. Four "job creation centers"
would be established in the shaded green areas.

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