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Thursday 16 October 2008
Bernanke says U.S. Economy Facing Big Threat
Turmoil in credit markets poses a “significant threat” to the U.S. economy, Federal Reserve Chairman Ben Bernanke said on Wednesday, suggesting an openness to further interest-rate cuts. PDF
NEW YORK (Reuters) - Turmoil in credit markets poses a “significant threat” to the U.S. economy, Federal Reserve Chairman Ben Bernanke said on Wednesday, suggesting an openness to further interest-rate cuts.
Bernanke said it will take some time to restore normal credit flows and pledged the U.S. central bank would continue to act aggressively to fight the crisis. Importantly, he said inflation risks were ebbing, which suggests Fed officials see latitude to lower borrowing costs.
“By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth,” Bernanke said.
“We will continue to use all the tools at our disposal to improve market functioning and liquidity,” he said, adding that policy-makers’ aggressive and quick response crucially distinguished this episode with the crisis of the 1930s.
The Fed, acting in concert with central banks around the globe, cut benchmark rates by a half-percentage point to 1.5 percent in an emergency move last week. It said an intensification of the financial crisis had raised risks to growth and diminished chances inflation could spike higher.
In the latest bid to restore financial market stability, the U.S. government on Tuesday announced a dramatic plan to recapitalize banks, beginning with a $125 billion equity investment in nine major financial institutions.
But even with the government scrambling to restore credit, Bernanke cautioned it will take time for the economy to heal.
“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” he said.
Stocks, already off sharply on weak economic data, added to losses on Bernanke’s gloomy economic assessment. In mid-afternoon, the Dow Jones industrial average was down more than 500 points, or about 5.4 percent.
“Bernanke’s comments in their entirety reinforce the sense that the Fed will lower interest rates when it meets again on October 29,” said Tony Crescenzi, chief bond market strategist, at Miller, Tabak & Co. in New York. “Rate cut odds were buoyed by Bernanke’s emphasis on the downside risks to growth and moderating inflation pressures.”
FEW BRIGHT SPOTS
Bernanke said the housing sector remained the economy’s weakest spot, but he also cited “marked slowdowns” in consumer spending, business investment and the labor market.
He also said credit markets would take time to unfreeze and said export sales, until recently a bright spot, were likely to slow as well.
While inflation had been high recently, Bernanke said expectations of future inflation had held steady or eased, import prices were moderating and commodity prices had fallen.
Those factors, along with the softness in the economy, “should lead to rates of inflation more consistent with price stability,” he said. “I think the evidence is now in that the inflation problems are moderating and look to be returning to price stability at a reasonable pace,” Bernanke said in response to a question.
The Fed chairman defended the government’s decision to let investment bank Lehman Brothers collapse last month, a development some analysts believe spurred a broader market panic.
“A public sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid,” he said.
In addition, the Treasury Department did not have the authority to absorb the billions of dollars of expected losses that would have smoothed the way for another company to buy the distressed institution, he said.
Recent legislation gives the Treasury greater resources to prevent the failure of any institution that may imperil the entire financial system, he said.
“The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them,” Bernanke said.
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Bernanke says U.S. Economy Facing Big Threat
By Pedro Nicolaci da Costa
15 October 2008
NEW YORK (Reuters) - Turmoil in credit markets poses a “significant threat” to the U.S. economy, Federal Reserve Chairman Ben Bernanke said on Wednesday, suggesting an openness to further interest-rate cuts.
Bernanke said it will take some time to restore normal credit flows and pledged the U.S. central bank would continue to act aggressively to fight the crisis. Importantly, he said inflation risks were ebbing, which suggests Fed officials see latitude to lower borrowing costs.
“By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth,” Bernanke said.
“We will continue to use all the tools at our disposal to improve market functioning and liquidity,” he said, adding that policy-makers’ aggressive and quick response crucially distinguished this episode with the crisis of the 1930s.
The Fed, acting in concert with central banks around the globe, cut benchmark rates by a half-percentage point to 1.5 percent in an emergency move last week. It said an intensification of the financial crisis had raised risks to growth and diminished chances inflation could spike higher.
In the latest bid to restore financial market stability, the U.S. government on Tuesday announced a dramatic plan to recapitalize banks, beginning with a $125 billion equity investment in nine major financial institutions.
But even with the government scrambling to restore credit, Bernanke cautioned it will take time for the economy to heal.
“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” he said.
Stocks, already off sharply on weak economic data, added to losses on Bernanke’s gloomy economic assessment. In mid-afternoon, the Dow Jones industrial average was down more than 500 points, or about 5.4 percent.
“Bernanke’s comments in their entirety reinforce the sense that the Fed will lower interest rates when it meets again on October 29,” said Tony Crescenzi, chief bond market strategist, at Miller, Tabak & Co. in New York. “Rate cut odds were buoyed by Bernanke’s emphasis on the downside risks to growth and moderating inflation pressures.”
FEW BRIGHT SPOTS
Bernanke said the housing sector remained the economy’s weakest spot, but he also cited “marked slowdowns” in consumer spending, business investment and the labor market.
He also said credit markets would take time to unfreeze and said export sales, until recently a bright spot, were likely to slow as well.
While inflation had been high recently, Bernanke said expectations of future inflation had held steady or eased, import prices were moderating and commodity prices had fallen.
Those factors, along with the softness in the economy, “should lead to rates of inflation more consistent with price stability,” he said. “I think the evidence is now in that the inflation problems are moderating and look to be returning to price stability at a reasonable pace,” Bernanke said in response to a question.
The Fed chairman defended the government’s decision to let investment bank Lehman Brothers collapse last month, a development some analysts believe spurred a broader market panic.
“A public sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid,” he said.
In addition, the Treasury Department did not have the authority to absorb the billions of dollars of expected losses that would have smoothed the way for another company to buy the distressed institution, he said.
Recent legislation gives the Treasury greater resources to prevent the failure of any institution that may imperil the entire financial system, he said.
“The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them,” Bernanke said.
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