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Some 14 states have only a few weeks left to gain approval for highway projects or risk losing millions of stimulus dollars.

All states have until the end of June to "obligate" half their share of stimulus funds for road and bridge improvements. If they don’t, the federal Department of Transportation will redistribute half the leftover money.

That means states must gain approval for their projects from the Federal Highway Administration, an agency of the Department of Transportation. The money doesn’t actually have to be spent, which can take months as projects go through the contracting and construction process.

States are sharing $26.6 billion for highway infrastructure projects, though only $18.6 billion is subject to the June deadline. The road allocations are among the earliest of the $280 billion in funds going to states and municipalities as part of the $787 billion recovery act.

While many states have safely cleared the hurdle, several have to buckle down in coming weeks if they hope to reach the 50% mark.

Alaska has only obligated 6.3% of its $122.8 million in funds, while Ohio has gained approval for only 15.7% of its $648.2 million share, as of May 22, according to the department.

These states’ progress stands in sharp contrast to places such as Wyoming, which has already won approval of 97.5% of its $110.3 million share.

Federal transportation officials are in close contact with their state counterparts to review and sign off on applications, said Joel Szabat, who co-leads the recovery effort for the department. They are approving nearly $1 billion in projects a week, nearly twice the typical rate.

More than 3,500 projects nationwide have already received the nod. Some states have dozens of projects approved in a day.

"One of our biggest focuses is that every state meets that deadline and is not penalized," Szabat said. The agency is "highly confident that every state will have over 50% obligated by the time the 120-day deadline comes around."

Ohio’s unusual path

Ohio transportation officials know they are moving at a slower pace than many of their peers elsewhere in the nation. That’s because they took a unusual path to decide what projects to fund, said Scott Varner, the state department’s spokesman.

The state received 4,600 ideas after soliciting proposals from cities, counties and people. It then narrowed the list down to 2,200 eligible for federal funding, before choosing 200 to invest in payday loans.

The Buckeye State is also seeking to fund some non-traditional projects as part of its highway allotment. For instance, it won approval to spend $6.8 million on replacing a shipyard crane in Toledo, which supports ship maintenance and vessel construction projects and will create or save 187 jobs. It is also hoping to get the okay on a $20 million investment in design work for Cleveland’s Opportunity Corridor, aimed at improving access from the city’s central east side to the freeway.

These initiatives required closer collaboration with federal officials since they aren’t the typical road repaving and bridge replacement work, Varner said.

"It did take a little more time in part because we had to work with our Federal Highway Administration office in Ohio," he said.

Still, state officials say they are not concerned they will miss the deadline. They are receiving approval for millions of dollars worth of projects a week, and have more than $50 million before federal reviewers now.

"We know which projects we have planned to meet the 120-day deadline," Varner said. "We think we’re on target."

Still, the delay has meant shovels have yet to hit the Ohio roads. The state has awarded two contracts and expects to approve up to 20 more by week’s end. Construction should start within the next month.

Wyoming working double-time

In Wyoming, transportation officials have sped up their contracting process in recent months. Work began on some projects in early May.

Normally, it can take six weeks for the state to advertise projects and for contractors to submit bids. Now it takes only three weeks. Also, the Wyoming Transportation Commission meets twice a month to award contracts, rather than just once.

As a result, the state has obligated nearly all of its stimulus funds for highway projects. And, officials feel that the rapid pace has brought in more competition, especially from out-of-state companies. Instead of having just two or three bidders per project, it is now seeing seven on average. And bids are coming in below estimates, freeing up money to fund more projects.

"If we could get our jobs out the door quicker, we felt we could get more competition from contractors," said Del McOmie, chief engineer for the Wyoming Department of Transportation. 

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India’s economy grew more than expected last quarter, easing pressure on Prime Minister Manmohan Singh to revive consumer demand as he starts his second term in office. Stocks and the rupee gained.

Asia’s third-largest economy expanded 5.8 percent in the three months to March 31, matching the revised gain of the previous quarter, the statistics office said in New Delhi today. Economists were expecting a 5 percent increase.

Growth is still almost half the pace at which India expanded in the past five years and Finance Minister Pranab Mukherjee this week pledged to boost spending in July’s budget. The economy is already showing “some signs” of revival from interest-rate cuts and fiscal stimulus worth 7 percent of gross domestic product, Mukherjee said.

“A 5 percent growth rate isn’t enough to absorb the rise in working population, risking unemployment,” said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore. “It’s important to see how the issue is tackled in the budget — too much in the way of giveaways may lead to further sell-off in the bond market.”

Stocks extended their gains after the better-than-expected growth figures, with the Bombay Stock Exchange’s Sensitive Index rising 1.6 percent to 14,519.75 at 11:05 a.m. in Mumbai. The rupee strengthened, advancing to 47.39 a dollar immediately after the report, from 47.46 earlier, according to data compiled by Bloomberg.

Asset Sales

The yield on benchmark bonds has climbed 28 basis points percent to 6.7 percent since Singh’s May 16 electoral triumph on concern the government will borrow more to fund its budget.

Still, India’s key Sensitive stock index has surged 18 percent during the period on optimism a coalition without communist parties will allow Singh to sell state assets and accept more foreign investments in insurance and banking.

The sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital for Mukherjee to find money to spend without widening a budget deficit that Moody’s Investors Service says has ‘deteriorated.”

India’s budget shortfall stood at 6 percent of GDP in the year ended March 31, more than double the target. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.

‘Key Reforms’

“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.

For now, Mukherjee said this week he plans to spend more to stimulate the economy, betting it will help boost tax revenues. He said the election results vindicate the strategy to pursue growth as a tool to improve people’s livelihood.

Almost 10 million people join India’s workforce each year and the International Labour Organization says India needs at least 10 percent economic growth each year for a one percent increase in employment no fax payday loans.

Lower interest rates and increased government spending is starting to yield results in the economy.

Car sales and the production of cement, electricity and refined petroleum are showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.

Forecasts Raised

UBS AG raised its growth forecast for India to 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.

The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.

Singh, as finance minister between 1991 and 1996, abandoned the Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.

‘Game-Changing’

Singh’s election triumph has been a “game-changing” verdict, says Macquarie Group Ltd. economist Rajeev Malik, describing it as a “catalyst in enhancing the evolving global rise of the Indian economy.”

In Singh’s first term between 2004 and 2009, India’s economy grew close to 9 percent on average each year, the fastest pace since independence in 1947, helped by a six-fold surge in foreign direct investments to $38 billion.

General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday the Indian elections was the best development in the country that he’d seen in 20 years and he was “completely optimistic about India in the long term.”

At stake are economic changes blocked by Singh’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

“The future looks promising in India,” said Fumio Ito, president of Kuraray Co. Ltd., the Tokyo-based chemicals maker, which this week announced the opening of its marketing unit in India. “When our operations expand, we will consider building a production plant in India.”

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Your home value has sunk like a stone, and you’re so far underwater you’ll have to hold your breath for years. Can you at least get a break on your property taxes?

In some cases, yes. Many municipalities’ tax bills are due in May, and the tab for 2009 could be lower.

As a rule, city and county assessors reappraise property values annually or biannually, using recent sales of comparable homes in the neighborhood to set values. So in areas that have seen significant drops in home prices, appraisals - and thereby property taxes - could also drop.

"Assessors have been flooded with requests from homeowners to reassess their home values," said Los Angeles County Assessor Rick Auerbach.

California is a special case, however, thanks to Proposition 13, a 30-year-old amendment to the state constitution that limited property tax increases to 2% per year. That meant that as California markets churned out double-digit price increases year after year, assessed values soon fell way behind market values.

As a result, only people who purchased homes at or near the market peaks are likely to have their homes revalued down. Those bought before 2003 likely have their assessed value still lagging market values.

For example, if you bought a home in Santa Monica in 1998 for $300,000, the home may still be worth $1 million - even after losing 25% of its value during the past two years. Meanwhile, its assessed valuation has only crept up about 25% to $375,000. No soup for you. As a matter of fact, your assessment should rise 2%.

However, recent buyers in areas such as Merced and Los Angeles, where prices have fallen more than 50% from their peak, should get tax breaks. Someone may have purchased a Merced house two years ago for $200,000, but the property is now valued at $100,000. The assessment, and the taxes, will be cut to reflect that decline.

In Los Angeles, the savings could be substantial; the average owner of those properties Auerbach is now reassessing should save an average of about $1,300 a year.

Less likely to get cuts

In other states, even if tax assessors reduce appraised values to reflect market conditions it still does not automatically mean a property tax cut car insurance. Localities could still raise their tax rates, the percentage of the home’s value that is used along with the assessed valuation, to calculate the final bills.

"Taxes are based on property values times [the tax rate]. We could have declining values but make up for it by raising the rate," said Bill Donegan, the property appraiser for Orange County, Fla., which includes Orlando.

This year, though, the value drops are so steep that any rate rise will probably not offset the lowered assessments. Plus, governments usually can’t just raise rates indiscriminately.

"In most places there’s a statuary limit to rate increases," said Ken Wilkinson, the property appraiser for Lee County, Fla., where Cape Coral home values have plunged 44% from their peaks. "In Florida, they can’t be raised more than 10%."

That should lead to substantial savings. In Orange County, the average taxpayer paid about 8% less last year, or nearly $130. "They may see a bigger drop this year," said Donegan.

The savings will be more modest, or non-existent, in states with lesser price declines. Many localities will raise rates enough to offset lower assessments, according to Joseph Henchman, the Director of State Projects for the Tax Foundation, a group that studies tax policy.

"The actual [revenue] collections could still rise or stay about the same," he said.

Governments may also raise fees on water, sewage and other services to keep up with looming budget deficits. They could even create entire new taxing entities, known as tax district, to fund fire departments, law enforcement, even libraries.

The local governments must keep revenues up to pay for programs they initiated during more flush times.

"We often see a ratchet effect," said Henchman. "Spending goes up when collections are strong but stay up even when collections go down." 

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The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Demand for some of the Fed’s emergency programs has waned as the grip of the credit crunch loosens, with loans to banks shrinking 38 percent since Jan. 1. The main tool to keep the central bank’s holdings from falling from the current $2.1 trillion would be more purchases of Treasuries, said analysts including former Fed Governor Laurence Meyer.

Until now, policy makers’ balance-sheet decisions have been driven by the emergency liquidity needs of banks, bond dealers, money markets and failing financial institutions. U.S. central bankers are now transitioning to a period where economic data and their implications for forecasts will play the key role.

“You wouldn’t want policy to reverse course dramatically or ramp up dramatically unless the outlook changed substantially,” John Weinberg, research director at the Federal Reserve Bank of Richmond, said in an interview. “It really hasn’t yet.”

Fed officials have said their Treasuries buying isn’t designed to target any specific yield levels. Last week’s release of minutes of the April 28-29 Open Market Committee meeting showed some members were open to bigger purchases to spur a more rapid recovery.

Bond Commitments

The Fed’s asset holdings have fluctuated around $1.8 trillion to $2.1 trillion this year. So far, the Fed has completed about $691 billion of the $1.75 trillion of purchases of Treasuries and housing debt it has committed to.

It’s difficult for Fed officials to predict how fast liquidity and loan programs will contract as markets normalize; adding to Treasuries buying would ensure growth in the balance sheet.

Funds extended to financial institutions, such as term credit to banks, discount-window loans, currency swaps with foreign central banks, and direct loans to bond dealers, fell to $701.8 billion May 20, down 38 percent from $1.13 trillion at the start of the year.

Fed credit and securities loans to backstop markets for commercial paper, asset-backed commercial paper, and U.S. Treasuries fell to $216.9 billion May 20, down 59 percent from $529.5 billion at the start of the year.

The central bank shifted to using its balance sheet as the main policy tool after cutting the benchmark interest rate to zero to 0.25 percent in December.

‘Next Stage’

“We have to go to the next stage of the monetary transmission mechanism, and we have to look at a lot of other interest rates,” said Glenn Rudebusch, associate director of research at the San Francisco Fed bad credit payday loans. “There are a lot of different avenues through which these balance-sheet policies can work.”

Fed Chairman Ben S. Bernanke, who once wrote about the need for aggressiveness and “Rooseveltian resolve” in dealing with financial crises, warned lawmakers this month that a “relapse” in financial strains could cause an incipient recovery to stall.

“The committee is looking at the trend in financial conditions and whether private borrowing rates are narrowing,” said Meyer, now vice chairman of Macroeconomic Advisers LLC in Washington. “The recent run-up in Treasury rates is blunting the effect of the narrowing spreads that is under way.”

Yield Premiums

The yield premium investors demand to own investment-grade corporate bonds has fallen to 4.16 percentage points from almost 6 percentage points in March, bolstered by economists’ expectations for an end to the recession this year.

Rising Treasury yields threaten to curtail the decline in corporate borrowing costs. Ten-year yields closed at 3.74 percent yesterday, up from 3 percent the day before the Fed announced its purchase program in March. The spread between two-year and 10-year yields reached a record 2.76 percentage points on concern surging U.S. debt sales will overwhelm the Fed’s efforts.

Fed officials, in their most recent forecasts, signaled that both of their legally mandated objectives — stable prices and maximum employment — are under threat. Policy makers forecast the unemployment rate will be above their long-run preference range of 4.8 percent to 5 percent through 2011.

Inflation Goal

Similarly, Fed governors and district-bank presidents anticipate that inflation will be slower than their median long-run objectives of 1.7 percent to 2 percent in 2009, and 14 members expect the rate to be below the range next year.

Plugging those forecasts into a model to determine the right policy stance, “the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years,” Rudebusch wrote in a research note released May 26.

“Markets are going to increasingly demand that there be some real green shoots” of an economic recovery, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. “They are going to have to step in at some point and put some more easing in.”

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Japan’s export slump moderated in April, helping the country post an unexpected trade surplus and adding to signs the worst recession since World War II is easing.

Shipments abroad fell 39.1 percent from a year earlier, after dropping 45.5 percent in March and a record 49.4 percent in February, the Finance Ministry said today in Tokyo. From a month earlier, exports rose 1.9 percent, a second straight gain.

Exports to the U.S., China and Europe all fell at the slowest pace this year, adding weight to Bank of Japan Governor Masaaki Shirakawa’s contention that the economy will resume growing this quarter. U.S. consumer confidence jumped the most in six years, a report showed yesterday, and China’s $586 billion stimulus plan is spurring demand for Japanese machinery.

“Exports are getting back on a sustainable growth path, and that’s good news because they’re the sole pillar of support for the economy,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The overall economy will probably remain stagnant as there is no help from consumer spending and business investment.”

The Nikkei 225 Stock Average rose 1.7 percent at 12:31 p.m. in Tokyo. The yen traded at 95.46 per dollar from 95.27 before the report was published. Japan’s currency has gained 3.3 percent this month, threatening to exacerbate losses forecast this year by exporters including Toyota Motor Corp.

Imports Fall

Imports fell 35.8 percent from a year earlier, the ministry said, and the trade surplus narrowed 85 percent to 69 billion yen ($725 million). Economists predicted a deficit of 55 billion yen and a drop in exports of 42 percent.

Shipments to the U.S. fell 46.3 percent last month, less than March’s 51.4 percent decline. Exports to China dropped 25.8 percent, moderating from 31.6 percent, and sales to Europe slid 45.4 percent from 56.1 percent.

Goldman Sachs Group Inc. last week raised its ratings of construction equipment-makers Hitachi Construction Machinery Co. and Komatsu Ltd., citing the prospect of increased sales to China, where the stimulus package is driving building investment. Nissan Motor Co. said last month that sales of passenger cars in China rose 36 percent in March.

Toyota’s U.S. sales had a “slight uptick” this month, indicating that the market may have reached its bottom, Jim Lentz, president of the automaker’s U fast cash.S. sales unit, said last week. Rival Honda Motor Corp. plans to boost output at domestic factories and increase shipments this quarter as U.S. dealerships clear inventories, the Wall Street Journal reported.

Production Rebound

Industrial production probably rose 3.3 percent in April from a month earlier, the biggest jump in at least six years, economists expect a Trade Ministry report will show on May 29. Output climbed in March for the first time in six months.

Gross domestic product shrank at a record 15.2 percent annual pace last quarter. Governor Shirakawa said this week that while the economy may resume growing in the current quarter, any recovery will “inevitably be mild.”

At their April 30 meeting, a few Bank of Japan board members said additional policy measures weren’t necessary amid signs that the economy will recover, albeit gradually and after “some time,” minutes showed today. The central bank has been buying corporate debt to channel funds to companies since it cut the benchmark interest rate to 0.1 percent in December.

Extraordinary Measures

“Financial-market conditions are much better now, so it’s natural for the BOJ to think about ending its extraordinary measures for helping companies,” said Morita at Barclays.

Exports across Asia have been mixed. While shipments abroad fell at a slower pace in Taiwan and South Korea last month from March, Singapore and China suffered bigger drops.

Two quarters of record contractions in GDP have shrunk the Japanese economy to its 2003 size. Even as declines in overseas shipments moderate, Japan is exporting little more than half as much as last year and producing a third less. The recession, while moderating, is spreading to consumers as companies fire workers and cut wages to minimize losses.

“Exports and industrial production have stabilized, but this only gets the economy out of the emergency room,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

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Rio Tinto Group, the world’s third- largest mining company, is hopeful of a “V-shape” economic recovery in China, boosting demand for iron ore as price talks with steel mills build toward settlement.

“What is unshakeable is our belief that China and India and the other emerging economies will be the key engines of any return to world growth and commodity demand growth,” Sam Walsh chief executive of the London-based company’s iron ore unit, its biggest earning division, said today at a conference in Canberra.

Rio sees “green shoots” of recovery in iron ore demand in China, the world’s biggest buyer, and expects annual price talks to end sooner than later, Walsh said. China will be able to meet its 8 percent growth rate target this year, Zhang Junsai, the nation’s ambassador to Australia, said today, backing Rio’s proposed investment deal with Aluminum Corp. of China.

“China buying is now setting a floor for bulk commodities prices,” Goldman Sachs JBWere Pty analysts led by Melbourne- based Malcolm Southwood said in a report. “Economic sentiment, demand for raw materials and commodities prices will be better in 12 months’ time and 24 months’ time, than they are now.”

Rio, battling shareholder and political opposition to the proposed $19.5 billion investment from Aluminum Corp., known as Chinalco, was little changed at A$64.01 at 12:33 p.m. Sydney time on the Australian stock exchange.

‘Worst Over’

The “worst is over” in demand for raw materials and prices for base metals may have bottomed, Goldman Sachs JBWere said in the report yesterday. There are early signs China’s 4 trillion-yuan ($586 billion) stimulus is boosting that nation’s economy, Australia’s Treasurer Wayne Swan earlier told the Minerals Week 2009 conference payday loans.

“We are ready to expand again” when there is a sustained recovery in metals demand, Walsh said at the conference. “Signs of improvement are present in recent data from China and such improvements continue the traditional recovery in exports and housing.”

Rio said this month it remains committed to the proposed Chinalco deal. The company has agreed to sell $7.2 billion of convertible bonds and stakes in projects worth $12.3 billion to Chinalco.

“Chinese investment in Australia is a win-win situation for the companies,” Zhang told reporters. “I understand the Australian government also welcomes Chinese investment and they will treat Chinese investment as they treat other international investments. That is the assurance we have been given by the Australian government.”

Australia Talks

Rio chairman Jan du Plessis arrives in Australia this week to hold talks with shareholders and government officials on the accord, Walsh told reporters. He held talks last week with investors in London.

“Once we have heard all those views we will determine the course of action in relation to the Chinaclo strategic alliance,” Walsh said. “It’s a situation that is evolving, and as has been made mention, we certainly have seen economic conditions improve since the deal was announced in February.”

Swan, who will make the final decision on the Chinalco proposal after an inquiry by the investment regulator, said today he won’t comment on the deal. “I never speculate about decisions that are before me as the minister for administering the Foreign Investment Review Board and the act we have,” Swan told reporters in Canberra.

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German business confidence rose for a second month in May as interest-rate cuts and government stimulus packages boosted expectations that the worst recession since World War II will ease later in the year.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 84.2 from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Chancellor Angela Merkel’s coalition is trying to pull Germany out of recession with a spending plan worth about 82 billion euros ($115 billion.) While the government expects the economy to contract 6 percent in 2009, Bundesbank President Axel Weber says there are “some grounds” to be optimistic about a recovery later this year.

“While the increase in the Ifo index was less than expected, the message is still positive,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “The worst is over, but we won’t see a crackling recovery.”

While Ifo’s measure of expectations increased to 85.9 from 83.9, a gauge of current conditions fell to 82.5 from 83.5. The euro fell a third of a cent after the report to $1.3958.

Rate Cuts Urged

“The expectations are signaling that we are approaching the lower turning point, however the current situation’s still weak,” said Ifo economist Gernot Nerb. “We certainly would propose cutting interest rates further, to come down to 0.5 percent.”

The European Central Bank this month reduced its benchmark rate to 1 percent, a record low, and ECB President Jean-Claude Trichet didn’t rule out taking it lower still. “We did not decide that the new level of our policy rates was the lowest level,” he said free credit report.

The global slump in demand is forcing companies to scale back production and cut jobs as earnings wilt.

“Capacity utilization is extremely low, more companies will go bankrupt and the labor market will suffer,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “We’ll see a certain stabilization of the economy, but this won’t be a proper upswing.”

Germany’s leading economic institutes predict the country will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million. German unemployment rose for a sixth straight month in April, taking the jobless rate to 8.3 percent.

Signs of Stabilization

Metro AG, Germany’s largest retailer, on May 5 reported a wider first-quarter loss as slumping consumer spending hurt revenue.

Still, German manufacturing activity contracted at the slowest pace in seven months in May, Markit Economics said May 21, and investor confidence rose more than economists forecast this month, climbing to a three-year high.

“The pace of contraction has weakened and some leading indicators have noticeably recovered,” the Bundesbank said in its monthly report last week. It will take time for the full impact of the government’s stimulus program and the ECB’s “very expansive monetary policy” to flow through, it added.

“There are some grounds for being optimistic,” Weber said in London on May 13. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track.”

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Federal Reserve Board Vice Chairman Donald Kohn said the U.S. economy may get a $1 trillion boost in coming years from the central bank’s purchases of government and mortgage debt, along with $175 billion in extra tax revenue.

Kohn defended the central bank’s response to the financial crisis and worst recession in 50 years while saying the central bank “needs a framework” for tightening credit when the economy rebounds. Some economists and Fed officials, including Philadelphia Fed President Charles Plosser, say adding the assets to the balance sheet risks spurring inflation.

“The preliminary evidence suggests that our program so far has worked,” Kohn, 66, said yesterday in a speech during a panel discussion at a conference on monetary and fiscal policy at Princeton University in New Jersey. He cited reductions in longer-term interest rates.

The Fed is in the process of buying $300 billion of long- term Treasuries through September, as authorized at the March meeting of the Federal Open Market Committee. Policy makers also at the time more than doubled planned purchases of mortgage- backed securities to $1.25 trillion this year and boosted federal agency debt purchases to $200 billion from $100 billion.

The comments make it more likely that Fed officials will “extend or expand” programs to purchase the assets, Michael Feroli, a JPMorgan Chase & Co. economist and former Fed researcher, said in a note yesterday.

Purchases may increase nominal gross domestic product as much as $1 trillion “over the next several years,” Kohn said in a footnote to his remarks.

Fire Sales

Other Fed interventions to aid bond dealers, mutual funds and credit markets also “have been successful in supporting economic growth” by lowering rates and “preventing fire sales of assets,” Kohn said.

Kohn, in his speech, said he’s “very much looking forward to” having the central bank “return to more normal modes of operation” as the economy rebounds.

While the purchases expose the Fed and taxpayers to potential losses, Kohn said several considerations make such an outcome unlikely. The Fed won’t need to sell some of the Treasury and agency debt because it will mature, and the central bank can fund the purchases at low cost. Also, the purchases boost the economy and tax receipts, he said.

Still, Kohn said “any calculation of the effect of our asset purchases on the economy is highly uncertain.”

U.S. nominal GDP fell to $14.1 trillion on an annual basis in the first quarter from $14.2 trillion in the prior three months and $14.4 trillion in the third quarter of 2008. It was the first back-to-back decline since 1958.

‘Believable’ Impact

Alan Blinder, a former Fed vice chairman who is a Princeton economics professor, said Kohn’s estimate of the effect on GDP from the mortgage-bond purchases is “believable cash advance loan.”

“It was supposed to reduce the risk spread between mortgage rates and other rates, and I think it has,” Blinder said in an interview. “You get these multiplier effects” on the economy from spending on housing, said Blinder, a panelist with Kohn at the conference.

Blinder said he’s “more dubious” about the Treasury purchases themselves. Any reduction in long-term rates makes it more difficult for U.S. banks to generate earnings to make up for what the Fed estimated earlier this month would be $600 billion in losses under adverse economic conditions. “It makes it harder for them to earn their way out,” he said.

Kohn reiterated his view that the U.S. 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.”

More Power

Kohn said closer cooperation between the Fed and “fiscal authorities” is an “inevitable aspect of effective policy initiatives to meet our macroeconomic objectives in the current financial and economic crises.” He reiterated that the central bank is working with the Obama administration to seek additional powers for the Fed to tighten credit.

Plosser, by contrast, said in a May 21 speech that “when a nation’s treasury or finance ministry and its central bank work too closely together, there is a clear risk that the government’s spending will end up being financed by the central bank’s power to create money and that the public will become confused as to their respective roles.”

“History shows us that you can get very bad economic outcomes with rapidly rising inflation,” said Plosser, 60, the Philadelphia Fed’s president since 2006.

Political Pressures

Central banks do “need a degree of insulation from short- term political pressures” to do their job of keeping prices stable and employment high, Kohn said.

Speaking during an audience discussion before his speech, Kohn said the central bank’s power to pay interest on banks’ deposits will do a better job of keeping the benchmark rate at the desired level as financial markets improve.

“It hasn’t been a totally effective floor,” he said. “As the balance sheet shrinks and as banks become better capitalized, that will become an effective floor.”

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Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

He said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.

The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. Chairman Sheila Bair.

Geithner, 47, shied away from declaring the financial crisis over, saying that credit is still "tight" and interest rates are still "high" for many business borrowers. He forecast that will improve gradually as companies and consumers reduce their debt levels to sustainable levels.

Recovery Process

“That’s going to make the process of recovery somewhat slower than it would otherwise be,” he added.

The Treasury chief said it was a “real concern” that some banks that received money from the government will rush to pay it back, impinging on their ability to increase lending. To discourage that from happening, banks that want to repay must show they have more capital than regulatory guidelines call for, and are able to raise money from the private sector “on a substantial scale” without government help, he said.

Geithner told lawmakers earlier this week that every $1 of capital at banks can generate more than $8 of lending. Still, he said in the interview that the Treasury won’t require that banks commit to specific increases in their lending as a precondition for paying the government back.

‘Deep Trouble’

“Lots of countries have got themselves in deep trouble with policies that force their banks to lend,” he said. “That’s likely to lead to a weaker, less efficient banking system, a less efficient economy.”

The government has distributed almost $300 billion in capital to about 600 U.S. banks and financial firms under the $700 billion financial rescue package approved by Congress last year. A number of lenders, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, have applied to repay the government funds.

Geithner is under pressure to institute a new set of rules this year for the financial-services industry.

“No one bails out little grocery stores,” U health insurance.S. Representative Jose Serrano, a Democrat from New York, told the Treasury chief at a hearing in Washington yesterday.

As part of its efforts to combat the crisis, the Treasury is putting together a Public-Private Investment Program to purchase as much as $1 trillion in distressed mortgage-backed securities and other assets from the banks. The partnerships would use $75 billion to $100 billion of government funds.

Bank Pressure

Geithner signaled he wouldn’t be concerned if the program doesn’t reach hundreds of billions of dollars within a few months. He declined to say whether banks should be pressured to participate, as Bair has suggested.

“We want to get these programs in place and see how they work,” he said. “They can be helpful and valuable in putting a floor under things, even if they don’t see a lot of early participation.”

Geithner said the credit crisis reflected “systematic failures” in financial oversight that would require “pretty significant changes across the board.” Among the changes the administration is considering is the establishment of an independent agency tasked with consumer protection.

The SEC may be stripped of some of its powers under the regulatory restructuring plan being put together by Geithner and National Economic Council Director Lawrence Summers, people familiar with the matter have said. In one scenario, the agency would lose its oversight of mutual funds to a new agency for policing consumer-finance products.

SEC Resources

Geithner praised SEC Chairman Mary Schapiro and said he would support giving her agency more resources where needed. He declined to say whether he thought the SEC should lose oversight of mutual funds as part of the overhaul.

He also said the administration is working with top lawmakers to craft a new regulator that would police risk across the financial system. He said no judgments have been made yet about who would fill that task, or what the roles of the Federal Reserve and Treasury will be. A “white paper” on the subject is due in several weeks, he said.

The Treasury chief brushed off suggestions that he and Summers were at odds with the FDIC’s Bair and that the two didn’t consider her a team player. He called Bair “very creative” and said that he had worked "very closely" with her.

“One of her great strengths is she’s a strong advocate for her agency and strong advocate of her points of view,” Geithner said. “That’s the kind of thing that everybody wants around the table, including Larry Summers.”

The Treasury chief belittled charges by former House of Representatives Speaker Newt Gingrich and other Republican leaders that President Barack Obama was adopting a "socialist" agenda. While markets can’t solve all America’s problems, the administration recognizes their importance, he said.

“It’s the least plausible charge anybody could say,” Geithner said. “The president understands how important markets and businesses are to the future prosperity of the U.S.”

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The Bank of Japan raised its view of the economy for the first time in almost three years on signs that a record contraction in the first quarter represented the worst of the recession.

“Economic conditions have been deteriorating, but exports and production are beginning to level out,” the bank said in a statement in Tokyo today. Previously it said the world’s second-largest economy had “deteriorated significantly.”

The central bank also decided to accept foreign currency- denominated sovereign bonds as collateral to make it easier for lenders to get cash. The first upgrade in the economic assessment since July 2006 indicates Governor Masaaki Shirakawa and his board may be reluctant to further expand a program of buying corporate and government debt, even as deflation looms.

“The upgrade of the economic assessment simply came as an endorsement to the recent set of data which had already signaled signs of a bottoming out,” said Izuru Kato, chief economist at Totan Research Institute Ltd. in Tokyo. Adding foreign currency-denominated debt as collateral should be taken as “one of many other tools for a rainy day,” Kato said.

The yen traded at 94.15 per dollar at 2:44 p.m. from 94.23 before the announcement and close to a nine-week high of 93.87 reached earlier today. The Nikkei 225 Stock Average fell 0.7 percent, heading for a weekly loss.

‘Leveling Out’

The central bank said “the pace of deterioration in economic conditions is likely to moderate gradually, leading to a leveling out of the economy.”

Industrial production and exports began to stabilize at the end of the first quarter, when gross domestic product shrank an annualized 15.2 percent, the steepest decline since records began in 1955.

The policy board unanimously voted to keep the benchmark overnight lending rate at 0.1 percent today. Since cutting the rate in December, it has begun buying commercial paper and corporate bonds from lenders, helping to ease a funding squeeze for companies.

Kintetsu Corp., an operator of rail and bus services in western Japan, will sell 10 billion yen ($106 million) of debt, the first sale of BBB-rated bonds in Japan since September, according to Bloomberg data. The difference between three-month commercial paper rated A1 against government financing bills of the same maturity was 11 basis points today from 141 on Dec. 16.

‘Easing of Tension’

“Financial conditions have remained tight, although there has been some easing of tension compared to some time ago,” the central bank said. It will accept bonds issued by the U.S., U.K., Germany and France in exchange for loans to lenders as part of a program to keep credit flowing in the economy payday advance lender.

The central bank’s assessment improved even as prospects for a global recovery darken.

The U.K. had the outlook on its AAA debt rating cut by Standard & Poor’s yesterday, and Treasury yields rose on speculation the U.S.’s rating may also be under threat. Treasury Secretary Timothy Geithner committed to cutting the budget deficit in an interview with Bloomberg Television.

The Chinese government said today that a recovery in factory output has yet to solidify as exports falter and firms struggle with “serious” overcapacity and falling profits.

Japanese Finance Minister Kaoru Yosano said this week that the GDP report signaled the “worst may be over, but efforts still need to be made to put the economy on an upward trend.” The government will also lift its economic assessment in a report on May 25, the first increase since February 2006, the Nikkei newspaper said this week, without citing sources.

Hurdles Remain

Japan still faces hurdles, including a swine flu outbreak and gains in the yen that threaten to exacerbate exporters’ losses. The currency has surged 4.7 percent against the dollar this month, and today climbed to the highest since March 19 after Yosano said the government isn’t considering intervening in the foreign-exchange market.

“Japan’s economy will probably return to a cyclical expansionary path later this year,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “But it will be an L-shaped recovery rather than a full-fledged one” as spending by consumers and businesses falters, he said.

The recession, while moderating, is spreading to households as companies including Toyota Motor Corp. and Hitachi Ltd. fire workers and slash wages to minimize losses. Mid-year bonuses will plunge a record 19.4 percent this year, according to the Keidanren business lobby group.

Deflation Concern

The Bank of Japan may face pressure to step up its debt purchases should weakening domestic demand exacerbate a decline in prices, ushering in a return of the deflation that plagued the country for a decade until 2005. The central bank forecasts consumer prices will fall 1.5 percent this fiscal year and keep sliding even when the economy resumes growing next year.

“Growing slack in the economy is increasing deflationary pressure,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo and a former central bank official. “If the BOJ is seriously committed to averting deflation, the bank would have no other choice but to aggressively buy risk assets.”

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