Bernanke offers no signal on rate cut/Jackson Hole speech likely to emphasise steps taken to protect economy

Bernanke offers no signal on rate cut
By Krishna Guha in Jackson Hole
Copyright The Financial Times Limited 2007
Published: August 31 2007 15:10 | Last updated: August 31 2007 16:20


Ben Bernanke offered no clear signal that the Federal Reserve is poised to cut interest rates in a speech to central bankers on Friday, even as he reaffirmed its commitment to take into account the likely effects of financial market turmoil on the economy.

The Fed chairman made it clear that there would be no rate cuts simply to bail out investors, declaring “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.”

But he also said that 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.”

The overall tone of the Fed chief’s remarks, at the opening session of its annual retreat in Jackson Hole Wyoming, suggested that the US central bank remains quite uncertain about the likely future path of interest rates.

This stands in contrast to the apparently high degree of certainty in the markets that the Fed will soon embark on a series of rate cuts.

President George W. Bush, in a speech later in the morning, echoed Mr Bernanke in saying that “speculators” could not expect to be bailed out. But he also proposed ways of helping homeowners escape defaulting on their subprime mortgages using modifications in the tax code. He also outlined reforms which might help avoid a repeat of the subprime fiasco.

In his speech, Mr Bernanke described the spillover effects from the turbulence in the markets in terms of risks or possible effects rather than certain consequences.

He made it clear that the magnitude of these effects would depend in large part on how long the current market dysfunction continues.

“If current conditions persist, the demand for homes could weaken further, with possible implications for the broader economy,” he said.

However, the Fed chairman did emphasise that well-functioning financial markets are “essential for a prosperous economy.”

He said recent economic data suggested that the economy grew at a “moderate pace” into the summer, but said that in the light of recent financial market developments, this data may not be a good guide to future economic performance.

He said the Fed would put particular weight on the most timely indicators, and on its contacts with the business community.

Mr Bernanke said the stock of unsold new homes in the US remains “quite elevated” and further declines in homebuilding are “likely.”

He said the Fed was “following closely” developments in financial markets that could put further pressure on the housing market.

Mr Bernanke said borrowers currently “face noticeably tighter terms and standards for all but comforming mortgages [mortgages that are eligible for purchase by Fannie Mae and Freddie Mac].”

The Fed chairman said “financial stress” has “not been confined to mortgage markets.”

He said banks have “become more protective of their liquidity and balance sheet capacity” as they have been obliged to take some risk assets back onto their balance sheets and honour credit lines pledged to back up commercial paper programmes.

Mr Bernanke said “global financial losses have far exceeded even the most pessimistic projections of credit losses” on subprime loans.

He said this likely reflects in part the fear that weakness in US housing will restrain US growth. But he added that ”other factors” were at work too. “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,” he said.

He said some repricing of risk was probably “healthy.” But he said this had “interacted with heightened concerns about credit risks and uncertainty about how to evaluate those risks to create significant market stress.”

As in past episodes of financial turmoil, he said, uncertainty about possible forced sales by investors with large borrowings have made other investors “hesitant” about taking advantage of possible buying opportunities.

Mr Bernanke said the subprime mortgage crisis was in large part the result of the ”failure of investors to provide adequate oversight of originators and to ensure that originators incentives were properly aligned.”

He said there would be no return to the days when banks kept all home loans on their books, rather than selling them on to investors.

But he said “clearly the originate-to-distribute model will be modified – is already being modified – to provide stronger protection for investors and better incentives for originators.”


Jackson Hole speech likely to emphasise steps taken to protect economy
By Eoin Callan
Copyright The Financial Times Limited 2007
Published: August 31 2007 03:00 | Last updated: August 31 2007 03:00


Ben Bernanke is likely to use a speech in Jackson Hole today to underscore the emergency steps the Federal Reserve has taken to keep financial markets liquid, writes Eoin Callan.

The moves started two weeks ago with a statement that policymakers detected an increase in risks to growth and would act to avoid adverse consequences for the economy.

The Fed made a 50 basis point cut in the discount rate on its loans to banks, taken to the tune of more than $2bn (€1.5bn, £1bn) by Bank of America, Citigroup, JPMorgan, Wachovia and Deutsche Bank.

It also helped unfreeze some parts of the credit markets by accepting as collateral securities backed by subprime mortgages and asset-backed commercial paper.

The Fed then approved exemptions for some very large banking institutions so they could allocate reserve funds to their more exposed dealer-broker arms.

There have also been less publicised changes to the System Open Market Account securities lending programme, increasing the supply of Treasury bonds sought by nervous investors.