Fed chief Ben Bernanke, speaking at an Atlanta Fed conference, has promised to increase the size of funds offered under the term auction facility should the need arise. Bernanke also said that, while markets have “improved,” they still remain “far from normal.” Stocks fell on the comments, which contrasted significantly with more optimistic colour from treasury secretary Hank Paulson and Bank of England head Mervyn King, both of whom suggested that the worst of the credit crisis could be over. Bloomberg:
The Standard & Poor’s 500 Index lost 1.54 points, or 0.1 per cent, 1,402.04 at 12:43 p.m. in New York. The Dow Jones Industrial Average decreased 56.42 points, or 0.4 per cent, to 12,819.89. The Nasdaq Composite Index slipped 3.39, or 0.1 per cent, to 2,485.1. Almost 10 stocks dropped for every eight that rose on the New York Stock Exchange.
The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks’ borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs.
Bernanke said the Fed’s efforts have yielded “some improvement,” while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.
Bernanke’s remarks are a departure from a new emerging consensus on Wall Street: that the worst is over and we’ll soon be off to the races. The cautious remarks also introduce some ambiguity in terms of the Fed’s next move after the “pause.” Look for more volatility as the market digests this new information.