Bernanke Appears Ready to Act

by: Roy Mehta

The Fed "stands ready to take additional actions" to increase liquidity and "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Fed chairman Ben Bernanke noted in his much anticipated speech Friday morning. It was his first public speech since the Fed, during a rare inter-meeting decision, lowered the discount rate by 0.5% on August 17th. Bernanke commented further on the recent economic weakness, "The 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." He acknowledged the spillover of the credit crisis to other parts of the economy and went on to say the "global financial losses (triggered largely by subprime mortgage concerns) have far exceeded even the most pessimistic projections of credit losses on those loans." This speech, along with the lowering of the discount rate, has led economists to believe Bernanke has switched to an easing bias from the tightening bias he had sustained until recently. However, he did say he was not interested in bailing out companies and investors after getting burned by the crunch: "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 decision." He also did not think the troubles would simply be solved by a rate cut saying, "Most estimates suggest that, because of the reduced sensitivity of housing to short-term interest rates, the response of the economy to a given change in the federal-funds rate is modestly smaller and more balanced across sectors than in the past." Markets traded lower after he delivered the speech but remained positive for the session.

Sources: Wall Street Journal,
Commentary: My Five Gripes With Ben BernankeWhy Do Fed Bankers Meet in Ritzy Jackson Hole?Tightening of the Liquidity Noose
Related: Ben Bernanke's Speech

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.