Financial Watch

The Federal Reserve has a more optimistic outlook for the U.S. economy, according to meeting minutes released Wednesday, but the central bank is still debating how to shrink its massive balance sheet.

The Fed now expects U.S. gross domestic product, the broadest measure of economic activity, to increase at an annual rate of between 3.2% and 3.7% in 2010. That’s up from the Fed’s previous estimate of between 2.8% and 3.5% in January.

GDP rose at a 3.2% annual rate in the first three months of this year, the government said last month.

The European Central Bank Wednesday declined to comment on financial market speculation that the ECB and other major central banks are preparing to intervene in the foreign-exchange markets to prop up the flagging euro.

The talk comes as traders circulate a report from a U.S. think-tank reportedly noting that the Group of Seven leading industrial nations are concerned about the speed of the euro’s decline. The report is also said to note that major central banks may be preparing verbal intervention to support the currency “if the rout continues.”

A proposal to audit the Federal Reserve gained momentum in the U.S. Senate on Thursday after the measure was softened at the last minute to address concerns raised by the central bank and Obama administration.

The full Senate may vote as soon as Thursday to include the audit proposal in a broad overhaul of financial regulation that would strip the Fed of its authority to supervise thousands of regional banks.

At least 20 Democratic and Republican lawmakers support the amendment from Senator Bernie Sanders, which would expand congressional investigators’ powers to audit the Fed. A bill approved by the House of Representatives in December contains a similar provision.

Demand for loans to buy U.S. homes raced to a seven-month high last week in the last hurrah for federal homebuyer tax credits that ended April 30, Mortgage Bankers Association (MBA) data showed on Wednesday.

Home purchase loan applications jumped 13 percent in the week ended April 30 to the highest level since early October, overshadowing a 2.1 percent drop in refinancing demand. Total mortgage applications rose by a seasonally adjusted 4 percent, the trade group reported.

It was the third straight weekly increase in purchase applications, rising almost 24 percent in the month. The share of loan refinancing fell to 51.9 percent of all applications, the lowest since early July 2009, the MBA said.

Today, the Financial Crisis Inquiry Commission continues its fourth round of hearings on the origins of the recession, with the current and former Treasury secretaries, Timothy Geithner and Henry Paulson, speaking on the shadow banking system — comprising financial companies like Goldman Sachs that are technically not banks because they do not take deposits.

In his prepared testimony, Paulson cites governmental homeownership policy as the underlying reason for the housing bubble and ensuing credit crunch:

Freddie Mac, the second-largest US mortgage finance company, said on Wednesday it would need an additional $10.6bn from the US Treasury Department to staunch losses on bad loans.

The company said it had lost $8bn, or $2.45 per share, in the first three months of 2010. The amount includes a $1.3bn dividend payment to the Treasury Department on senior preferred stock issued as part of a 2008 government-led bail-out. Along with larger rival Fannie Mae, Freddie is propping up the housing market by purchasing mortgages in the secondary market.