Fed Ready To Act To Ensure Market Stability: Bernanke

Source : The Business Times, October 17, 2007

Setbacks expected as full recovery likely to take time

(NEW YORK) US financial markets are healthier after a turbulent summer, but a full recovery will take time and the Federal Reserve will act as needed to support market stability as well as non-inflationary growth, Fed chairman Ben Bernanke said on Monday.

'Conditions in financial markets have shown improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks,' Mr Bernanke told the New York Economic Club.

'The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain,' he said. 'For now, the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability.' The US central bank lowered benchmark overnight interest rates by a surprisingly large half-percentage point to 4.75 per cent on Sept 18.

Mr Bernanke said that 'by doing more sooner' the Fed hoped it could forestall any damage to the economy from financial disruptions triggered by mortgage delinquencies.

At the same time, policy-makers were prepared to reverse course and raise borrowing costs if inflation pressures - which seemed to have moderated - rekindled, he said.

Asked by a member of the audience about the impact of a weaker dollar, Mr Bernanke said: 'One cannot deny that when the dollar depreciates there is some inflationary impact', but added that the impact had been smaller in recent decades.

The Fed chief also said that expectations of slower growth would underpin hopes that price gains would moderate and that the central bank remained focused on keeping inflation low.

Mr Bernanke said policy-makers considered the possibility that the Fed's move to cut rates to restore stability to financial markets might promote 'excessive' risk-taking.

But the Fed reasoned that improved market functioning would increase chances of putting the economy on track for non-inflationary growth during a period of strain.

The Fed meets again on Oct 30-31 and markets see a 32 per cent chance that policy-makers will cut benchmark overnight borrowing costs by a quarter-percentage point then, as implied by short-term federal funds futures.

Economic information published since the September Fed meeting points to the housing slump exerting a 'significant' drag through early 2008, Mr Bernanke said. The Fed is closely monitoring whether tighter credit has affected business or household spending, he added. -- Reuters