WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke on Wednesday diluted criticism of his handling of a global credit crisis with measures to boost bank liquidity that were seen as a constructive step that might well work.
By Alister Bull
WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke on Wednesday diluted criticism of his handling of a global credit crisis with measures to boost bank liquidity that were seen as a constructive step that might well work.
It was a quick turnaround.
Bernanke was slammed on Tuesday for lacking a sense of urgency after the Fed cut interest rates by a modest quarter-percentage point and declined to offer a signal of the further action some critics felt was warranted.
!ADVERTISEMENT!Instead, it held fire and then unveiled a fresh initiative with other central banks on Wednesday that looks likely to do a better job at lubricating the wheels of international finance than other action taken since a credit crunch hit in August.
The Fed's move was coordinated with the European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Canada.
It was the first collective central bank effort since the aftermath of the September 11 attacks on the United States.
"This will help to improve the distribution of liquidity in the system," said Marvin Goodfriend, a former top Fed adviser and professor of economics at Carnegie Mellon University.
The more deliberate and measured response from the Fed might not satisfy markets, but may still be the best policy, in Goodfriend's opinion.
"The Fed is willing to be patient because it sees that the system is repairing itself," he said, noting that several major banks have announced major cash injections from outside investors to repair subprime mortgage losses.
Financial market participants might feel the Fed is behind the curve in responding to credit market upheaval.
But plenty of others worry aggressive rate cuts would repeat the mistakes that fueled the rampant U.S. housing market and got the country into its current predicament when the bubble eventually burst.
A LITTLE CREATIVE BANKING
"The fed funds rate is the wrong instrument with which to address the problems that they are facing," said Stephen Cecchetti, a former research director at the New York Fed. He was referring to the overnight interbank lending rate the Fed cut to 4.25 percent on Tuesday.
On Wednesday, the U.S. central bank announced the creation of new auction facilities to boost the ways in which banks can obtain cash from the central bank, and said it was setting up international swap arrangements to get dollars to European institutions that need them.
"Central banks have good tools in getting liquidity into the market, but they do not have good tools with which to distribute it to the institutions that need it most. I think this is a very creative step," said Cecchetti, now a professor at the Brandeis International Business School.
The new steps were prompted by persistently wide spreads in the interbank lending market that hampered normal market operations and risked harming growth by tightening credit conditions.
"Always the academic, Chairman Ben Bernanke may well be rewriting the textbooks on monetary policy," wrote Sherry Cooper, chief economist at BMO Capital Markets.
Many economists had been disappointed on Tuesday that the U.S. central bank decided not to lower the discount rate by more than the quarter-point reduction it made in the overnight fed funds rate. The discount rate, which is the interest rate the Fed charges banks for direct loans, now stands at 4.75 percent, after the Fed's quarter-point cut on Tuesday.
The disappointment some felt was somewhat soothed by the moves laid out on Wednesday.
"We still need that sense of urgency, but this is a step in the right direction," said David Jones at DMJ Advisers. "You need to give the market pleasant surprises and this today was a pleasant surprise."
The Fed has lowered overnight borrowing costs by a full percentage point since problems in the U.S. subprime mortgage market spurred a global credit crunch in August.
But it has tried to separate monetary policy moves, aimed at offsetting the macroeconomic fallout of the slumping housing market on the wider economy, from targeted action to keep the financial system functioning smoothly.
Its policy statement on Tuesday made no reference to the collective liquidity measures that were in the offing and some market practitioners felt they should have been given a hint, even if details had to wait for central banks in Europe to reopen on Wednesday.
"We were a bit surprised to not have it mentioned on Tuesday, but we think the measures look very good on the surface," said Zach Pandl, an economist at Lehman Brothers. "They understand the issues and are willing to act."
(Editing by Jan Paschal)
