Fed Ready To Act To Limit Damage From Sub-Prime: Bernanke

Source : The Business Times, September 1, 2007

But Fed chief gives no clear signal for interest rate cut at next meeting on Sept 18

JACKSON HOLE, Wyoming) Ben Bernanke, chairman of the Federal Reserve Board, declared yesterday that the central bank 'stands ready to take additional actions as needed' to prevent the chaos in mortgage markets from derailing the broader economy.

Mr Bernanke offered no explicit hint that the central bank will reduce the benchmark federal funds rate at the next policy meeting on Sept 18, and his remarks suggested that the Fed was unlikely to take any action before that date unless economic conditions deteriorate.

But he said nothing to dissuade investors from expecting a rate cut at that meeting, and financial markets have been betting on the near-certainty of such a move ever since the Fed took a partial step on Aug 17 of reducing its discount rate, which applies to emergency short-term loans to banks.

In anticipation of the speech, Wall Street rallied, with the Dow Jones industrial average jumping as much as 140 points.

Once Mr Bernanke's remarks were released at 10 am, investors trimmed those gains slightly. But all three major American stock indexes remained up nearly one per cent at 11 am.

In the long-awaited speech, his first since the nation's credit markets began to seize up several week ago, Mr Bernanke made it clear that the Fed's decision to cut interest rates will heavily depend on what happens to the housing and housing finance.

'Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the rest of the economy,' he told listeners at the Federal Reserve's annual symposium here in the Grand Tetons. 'We are following these developments closely,' he added.

Mr Bernanke walked a tight line between trying to reassure financial markets and locking the Federal Reserve into a rescue effort that could prove either unwarranted or unwise over the longer term.

Investors around the world had awaited his speech with an almost obsessive fixation in recent days, as what began as a panic in sub-prime mortgages for people with weak credit continued to freeze up lending on scores of other fronts, from 'jumbo' mortgages to borrowers with good credit to a growing number of billion-dollar leveraged buyouts.

Mr Bernanke spelled out a much tighter and more explicit link between the next decisions on interest rates and what happens in the housing market.

That was important, because the Fed has generally focused on the health of the overall economy rather than individual sectors. In an added attempt to soothe investors, Mr Bernanke also suggested that the central bank would focus less heavily than usual on incoming economic data, which has yet to signal a clear downturn.

'Economic data bearing on past months or quarters may be less useful than usual for our forecasts,' he said. 'As a result, we will pay particularly close attention to the timeliest indicators, a well as information gleaned from our business and banking contacts around the country.'

Meanwhile, US President George Bush yesterday pledged to help people with risky sub-prime mortgages keep their homes and tighten safeguards against predatory lending, while rejecting a bailout for 'speculators'.

'I plan to help homeowners, the government's got a role to play,' Mr Bush said. '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.' Mr Bush said that he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favourable rates.

Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth. -- Bloomberg, NYT