Bernanke says Fed will act as needed

Date: Friday, August 31, 2007
Author: Darla Mercado,

The Federal Reserve is poised to protect the markets, but doesn't seem inclined to cut interest rates in the near future.

“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,” remarked Fed chairman Ben Bernanke at the Federal Reserve Bank of Kansas City’s Economic Symposium today in Jackson Hole, Wy.

Still, Mr. Bernanke acknowledged that developments in the financial markets may have broad effects on the economy, which the Fed would keep in mind when determining monetary policy.

Noting that the Fed came to the rescue this summer, providing cash reserves to strained money markets and reducing the direct lending rate to banks by half a percentage point to 5.75%, Mr. Bernanke said that the central bank was prepared to provide liquidity to keep the markets rolling.

“Basically the Fed is saying they’re poised to move quickly on any evidence of economic weakness,” said Brian Bethune, a U.S. economist at Global Insight Inc. in Lexington, Mass.

“They’re moving in the right direction, focusing on systemic risk to the markets and stepping up their monitoring.”

Despite Mr. Bernanke’s comments, Mr. Bethune also forecasted a rate cut of 50 to 75 basis points in the next few months, based on economic weakness and a housing market that will probably have an accelerated decline toward the end of the year.

“He is saying the Fed will base its policy on systemic risk to the economy and that this shouldn’t be construed as a move to support bad investment decisions,” Mr. Bethune added.

Recently, the commercial banks also seem to have turned up their noses at the Fed’s lowered lending rates for the discount window.

As of Wednesday, borrowing from the Fed’s discount window fell to $1.1 billion, down from the $2.0 billion borrowed last week — which was when Citigroup, JPMorgan Chase, Bank of America and Wachovia each took $500 million.