'Bernanke shows crisis-handling mettle'
warrants.bnpparibas.com
JACKSON HOLE, Wyo., Sept 1 (Reuters) - Federal Reserve Chairman Ben Bernanke soothed financial markets this week with a pledge at an annual mountain retreat to limit damage to the economy from financial turmoil and parried critics of his understated style by showing a keen grasp of current hazards.
"He stated clearly that the Fed's objective is to provide liquidity to restore order to short-term funding markets, and he stated clearly the Fed would be active in taking the necessary action to avoid recession," said Mickey Levy, chief economist for Bank of America.
After several weeks of market turmoil, financial markets and policy-makers around the world tuned in to Bernanke's Friday speech at the Kansas City Fed's gathering here of central bankers, private sector economists and academics, with heightened anticipation.
Many in financial markets were clamoring for the Fed to trim the benchmark fed funds rate from its current 5.25 percent to prevent further spread of upheaval spurred by surging subprime mortgage foreclosures and the bursting of the U.S.
housing bubble.
The Fed stepped in Aug. 17 by cutting the discount rate, the rate it charges banks for loans, in a bid to restore flows to credit markets, but left the fed funds rate unchanged.
Critics charged the central bank with underestimating collateral damage from the downtrodden housing market and risks that consumers would pull back, slowing the economy to a crawl or worse.
Bernanke allayed some of those fears in his speech in Wyoming, showing his sensitivity to economic danger is not that far removed from the concerns of financial markets, participants in the elite conference said. The Fed chair acknowledged that global financial losses have far exceeded the most pessimistic projections of credit losses on subprime loans.
Also, while Bernanke noted it is not the Fed's role to protect investors from losses, he made clear the central bank has a stake in maintaining smoothly functioning financial markets.
"The financial market participants' assessment of the housing downturn and its implications has for quite some time been more adverse, more serious than that of the Federal Reserve," said Allen Sinai, chief global economist for Decision Economics, Inc. "What is clearly coming through in comments of the chairman is how aware the Federal Reserve is of the risk."
Bernanke's comments helped fuel a rally in stock markets on Friday. Markets are widely expecting a quarter-percentage point interest rate cut by the mid-September meeting of the Fed's policy-setting Federal Open Market Committee.
Taken along with the Fed's cut to the discount rate, Bernanke's performance at Jackson Hole showed him a steady hand under pressure, a quality some had been doubting, participants at the conference said.
"He put to rest this asleep-at-the-wheel story-telling that you heard in the market," said Ethan Harris, chief U.S.
economist for Lehman Brothers. "This is his first major challenge."
Even so, the Fed's position has evolved fairly rapidly from its policy statement in early August, when it said inflation was its predominant concern. Bernanke said on Friday that further tightening of credit conditions could prolong or deepen the housing slump and hurt consumer spending and the economy.
Some prominent economists at the conference suggested the Fed should move immediately to interest rate cuts to restore economic stability.
Martin Feldstein, chief executive of the National Bureau of Economic Research, who chaired the second day of the symposium, said in concluding remarks at the symposium that an argument could be made for the central bank to cut interest rates by a full percentage point to prevent house price declines or a pullback in consumer spending from causing a recession.
"Experience suggests that the dramatic decline in residential construction provides an early warning of a coming recession. The likelihood of a recession is increased by what is happening in credit markets and mortgage borrowing," he said.
If the Fed cuts rates and the result is instead higher inflation, that would be the lesser of two evils, Feldstein said. . |
