- (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke,
in his first public remarks in six weeks, said the central bank will do
what's needed to prevent this month's credit market rout from undoing the
six-year expansion.
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- The Fed "continues to monitor the situation and
will act as needed to limit the adverse effects on the broader economy
that may arise from the disruptions in financial markets," he said
at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming. "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."
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- Bernanke's comments are his first since losses in the
subprime mortgage market that pushed up the cost of credit for consumers
and companies. The Fed was forced two weeks ago to cut the interest rate
on direct loans to banks and shift its policy focus to growth, rather than
inflation. The Fed chief suggested the Fed is prepared to cut the discount
rate further or use additional tools to ease market strains.
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- ``The Federal Reserve stands ready to take additional
actions as needed to provide liquidity and promote the orderly functioning
of markets,'' Bernanke said.
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- The speech comes amid the most tumultuous period of Bernanke's
19-month tenure, after a sudden increase in corporate borrowing costs resulting
from the contamination of asset-backed securities linked to subprime mortgages,
which are home loans to borrowers with low credit scores or limited credit
histories.
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- All Options
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- Today's speech suggests officials are considering all
options between now and the Sept. 18 policy meeting, and are likely to
lean against the risks of a slowdown in growth even though current economic
data are relatively strong. Bernanke also made clear the central bank won't
rescue investors from bad decisions.
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- ``It is clear now the Fed is on the ball; they understand
what is happening in markets,'' said Christopher Low, chief economist at
FTN Financial New York. ``It does suggest that they are willing to cut
rates,'' he added, predicting quarter-point reductions in September, October
and in January or March.
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- Stocks pared gains after Bernanke's remarks while Treasury
securities remained lower. The Standard & Poor's 500 index rose 0.6
percent to 1,466.55 at 11:22 a.m. in New York, after advancing as much
as 1.3 percent earlier. The yield on the benchmark 10-year note was at
4.53 percent.
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- `Broad' Effects
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- ``It is not the responsibility of the Federal Reserve
--nor would it be appropriate -- to protect lenders and investors from
the consequences of their financial decisions,'' Bernanke said. ``But the
developments in financial markets can have broad economic effects felt
by many outside the markets, and the Federal Reserve must take those effects
into account when determining policy.''
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- Bernanke spoke as President George W. Bush pledged to
alleviate the crisis among homeowners unable to pay their loans. Bush said
he will let the Federal Housing Administration, which insures mortgages
for low-and middle-income borrowers, guarantee loans for delinquent borrowers.
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- Delinquencies in adjustable-rate subprime mortgages originated
in late 2005 and 2006 ``are likely to rise further,'' Bernanke said. The
Fed's mountainside gathering is attended this year by central-bank officials
from some 30 countries and almost all of the Fed's policy-setting Open
Market Committee.
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- Avoiding Risk
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- ``Investor uncertainty has increased significantly, as
the difficulty of evaluating the risks of structured products that can
be opaque or have complex payoffs has become more evident,'' Bernanke said.
``Investors may have become less willing to assume risk.''
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- On Aug. 7, the Federal Open Market Committee voted to
leave the main interest rate at 5.25 percent for the ninth straight time
and reiterated that inflation was its main concern, though risks to economic
growth had increased ``somewhat.''
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- Two days later, BNP Paribas SA, France's biggest bank,
was forced to halt withdrawals from three of its investment funds, and
money market rates rose worldwide, leading central banks to pump cash into
the banking system. The Fed followed actions by the European Central Bank
with its biggest cash infusion since the aftermath of the Sept. 11, 2001,
attacks.
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- The moves weren't enough to stem the crisis of confidence
in credit markets. On Aug. 17, after an emergency videoconference, the
Fed cut the cost of direct loans to banks and revised its economic outlook,
opening the door to lowering the benchmark federal funds rate, which covers
overnight loans between banks.
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- Yields Drop
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- Still, since then, financing has remained costly or constrained
for riskier securities and loans. Investors have fled to Treasuries, pushing
yields on two-year notes to more than 1 percentage point below the Fed's
5.25 percent benchmark rate, a sign buyers anticipate a series of rate
cuts.
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- The collapse of the U.S. housing-market boom in the first
half of the decade is taking its toll on the broader economy. Residential
construction has subtracted from economic growth for six straight quarters,
the longest streak since 1982, and lopped 0.6 percentage point off the
expansion in the three months through June.
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- Gross domestic product rose at a 4 percent annual rate
in the second quarter, the Commerce Department said yesterday, up from
an initial estimate of 3.4 percent.
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- In the FOMC's Aug. 17 statement, the panel omitted references
to inflation and said risks of slower growth had increased ``appreciably.''
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- ``The committee is monitoring the situation and is prepared
to act as needed to mitigate the adverse effects on the economy arising
from the disruptions in financial markets,'' the Fed said Aug. 17.
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- To contact the reporter on this story: Craig Torres in
Washington at ctorres3@bloomberg.net ; Scott Lanman in Jackson Hole, Wyoming,
at slanman@bloomberg.net .
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