Bernanke, Finally

Source : Weekend, TODAY, September 1, 2007

Fed chief promises to act, but also voices concerns

WYOMING — For those who had been disappointed with United States Federal Reserve chairman Ben Bernanke’s apparent reluctance to intervene in financial markets spooked by the subprime loan crisis, his much-awaited speech on Friday offered some words of comfort — even as he hinted at more darks clouds gathering on the horizon.

An hour later, US President George W Bush provided more balm by pledging to help Americans with risky sub-prime mortgages to keep their homes, while rejecting a bailout for “speculators”.

In a speech he gave at the Kansas City Fed’s annual seminar in Jackson Hole, Mr Bernanke said the Fed “stands ready to take additional steps” to boost liquidity and “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets”.

But he also made it clear that “it is not the responsibility of the Federal Reserve” to protect lenders and investors “from the consequences of their financial decisions”.

The speech on Friday was his first public address since Aug 17, when the Fed lowered the discount rate amid a crisis of confidence in the credit markets. The discount rate — the rate the Fed charges banks that borrow directly from it — was cut by 50 basis points to 5.75 per cent.

For many analysts, Mr Bernanke’s remarks on Friday suggest that the US central bank is set to lower rates unless short-term credit market conditions improve.

“It is clear now the Fed is on the ball; they understand what is happening in markets,” said Mr Christopher Low, chief economist at FTN Financial New York. “It does suggest they are willing to cut rates in September.”

According to Dow Jones, investors are now expecting reductions in the Fed’s primary tool, the federal-funds target rate, which has stood at 5.25 per cent for more than a year. Wall Street expects the first rate cut to come at the Fed’s next meeting on Sept 18.

But while the markets may be pleased with his signal, the other aspects of Mr Bernanke’s speech suggest there is little else to cheer about.

Among the worrying economic signs he listed: Recent global financial losses are more than expected; economic uncertainty is greater than normal; and the housing industry is set to weaken further.

Mr Bernanke said that “further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally”.

In fact, “global financial losses (triggered largely by subprime mortgage concerns) have far exceeded even the most pessimistic projections of credit losses on those loans”.

Mr Bernanke also seemed to pull back from the Fed’s long-standing mantra that the US economy will grow moderately in coming quarters. Though the economy expanded at “moderate pace into the summer”, he said, “economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation”.

“Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy.”

Thus, economic uncertainty is higher than usual, he added.

Not long after the Fed chairman spoke, President Bush announced that he would allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers.

“This means that many families who are struggling now will be able refinance their loans, meet their monthly payments and keep their homes,” Mr Bush said in a statement at the White House.

He added: “I plan to help homeowners, the government’s got a role to play. But it’s not the government’s job to bail out speculators or those who made the decision to buy a home they couldn’t afford.” —AGENCIES