Bernanke Says Central Bankers Ready for More Actions (Update2)
Nov. 14 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions as needed to unfreeze credit markets, citing continued strains even amid “tentative improvements.”
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,” Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. “For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.”
Bernanke led the ECB and other central banks last month in the broadest coordinated interest-rate cut in history. The Fed also removed limits on currency-exchange programs with four of its counterparts, including the ECB, and agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore.
Economic data this week signaled that policy makers have failed to avert a global downturn. Gross domestic product in the 15 euro nations contracted 0.2 percent in the third quarter and the Organization for Economic Cooperation and Development predicted yesterday that the economies of its 30 developed member nations will shrink next year by 0.3 percent.
“Monetary policy actions have not resolved the ongoing strains in financial markets,” Bernanke said in prepared remarks at the ECB conference, which is marking the 10th anniversary of the euro. ECB President Jean-Claude Trichet, Bank of Israel Governor Stanley Fischer, People’s Bank of China Deputy Governor Su Ning and Banco de Mexico Governor Guillermo Ortiz are also scheduled to speak.
Fourth Consecutive Drop
Retail sales in the U.S. dropped in October by the most since records began in 1992, the U.S. Commerce Department said today. The 2.8 percent decrease was the fourth consecutive drop. Purchases excluding automobiles also fell by the most ever.
Bernanke said “financial markets remain under severe strain,” while noting “tentative improvements in credit-market functioning.”
He didn’t specify what new steps central banks could take. The Fed, ECB, Bank of England and other central banks have all lowered rates since the coordinated cut on Oct. 8. While the governments probably won’t coordinate fiscal policy, their actions will likely become increasingly similar, Bernanke said.
“It’s increasingly likely there will be a convergence” in fiscal policy, Bernanke said in response to an audience question.
Central banks created the currency swap lines in response to “strong demand for dollar funding” in the U.S. and other countries, Bernanke said. The “recent sharp deterioration” in interbank and other funding markets, where some financial institutions normally got dollars, left some companies “without adequate access to short-term dollar financing,” he said.
Since the coordinated rate reduction, the Fed has cut its benchmark rate another half-point to 1 percent. The central bank has provided more than $1 trillion in loans to financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. The Federal Open Market Committee next meets Dec. 16.
“Bernanke’s remarks make us think another coordinated rate cut cannot be ruled out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. There is “no hint that the Fed has run out of bullets,” he said.
Corporations with investment-grade credit ratings were paying a premium of about 6 percentage points above comparable Treasuries to issue debt as of Nov. 4, up from 5 points a month earlier and 2.5 points in May, according to Merrill Lynch & Co.
“Central bankers and other policy makers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,” Bernanke said.
The U.S. economy may contract at a 3 percent annual pace this quarter, the median estimate in a Bloomberg News survey of 59 analysts this month. Economists don’t expect growth to resume until the three months ending in September 2009. The Fed is forecast to reduce the federal funds target rate to 0.75 percent by the end of December and 0.50 percent in the first quarter.
Fed governors and district-bank presidents updated forecasts at the FOMC’s Oct. 28-29 meeting. Those will be released along with the meeting minutes on Nov. 19.