Fed chief adopts Greenspan tone to appease financial markets - WASHINGTON
WASHINGTON - FEDERAL Reserve chairman Ben Bernanke borrowed a page from Mr Alan Greenspan’s crisis playbook when he promised emphatically to cut interest rates further if the weak United States economy needs the help.
The response from Wall Street on Thursday shows that the former Princeton economics professor is improving but still has a few things to learn before he can match Mr Greenspan’s magic in wowing financial markets.
Still, the effort rated at least a ‘B+’, while Mr Bernanke’s previous attempts to handle the first major crisis in his two-year tenure at the Fed got far lower grades.
The Dow Jones Industrial Average reacted to the last Fed rate cut on Dec 11 by plunging 294.26 points - not exactly the response Mr Bernanke was seeking as a way to instil confidence that he was up to the task of combating America’s worst credit crunch since the savings and loan crisis of the 1980s and early 1990s.
The problem has been that Mr Bernanke and his Fed colleagues have appeared to be providing rate relief in a grudging fashion, disappointing investors who want a full-throated pledge that the central bank is prepared to do whatever is needed to keep the US from falling into a recession.
In a Washington speech on Thursday, Mr Bernanke was more forceful.
‘We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.’
That was more like it, investors said, pushing the Dow average up by 117.78 points. It was welcome relief for a market that has been plunging in the new year, as investors have had to digest one bad piece of news after another indicating that the US is moving dangerously close to a recession.
The most ominous signal on that score came last week, when the government reported that unemployment last month shot up to 5 per cent from 4.7 per cent in November. That was the biggest one-month gain in the jobless rate since October 2001, a time of massive layoffs in the travel industry following the September terrorist attacks.
The worry is that a two-year slump in housing, which shows no signs of easing, has now started to spread to other sectors of the US economy, especially the financial services industry. Various industry leaders have declared multibillion-dollar losses because of bad bets on securities backed by sub-prime mortgages, where defaults are soaring.
ASSOCIATED PRESS
Source : Straits Times - 12 Jan 2008
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