More steps needed to stabilise banks: Bernanke

Reuters

RATES HOLD? US Federal Reserve chairman Ben Bernanke. The Fed is expected to leave benchmark lending rates unchanged at its policy meeting this week and will probably signal that borrowing costs will stay steady for several months.

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US Federal Reserve Chairman Ben Bernanke says that fiscal stimulus alone will not be enough to promote a lasting US economic recovery, and further steps to backstop banks may be needed.

"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilised and strengthen the financial system," Bernanke said at the London School of Economics.

In his first policy speech since early December, Bernanke said that while an expected US fiscal stimulus package could provide a "significant boost" to the economy, the government may need to inject more capital into banks.

He also said a large quantity of distressed assets on bank balance sheets made it difficult for banks to raise capital and lend.

Bernanke said the government could consider buying troubled assets, providing asset guarantees or setting up a so-called bad bank to take over assets in exchange for cash and equity.

"With the worsening of the economy's growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions," he said.

It would also take some time for the US labour market to recover, Bernanke said. "I would expect to see continued weakness in the first quarter," he said in response to a question.

"I am hopeful that later in 2009, depending on factors, particularly including financial and credit markets, we should begin to see some stabilization in the economy. It takes a while though for labour markets to recover."

GLOBAL ECONOMY TAKES A HIT

Bernanke flagged the need for regulatory reform and said he had discussed the issue, as well as monetary policy, with British Prime Minister Gordon Brown, Chancellor of the Exchequer Alistair Darling and Bank of England Governor Mervyn King.

"It is very important for us to try to put out the fire. It is good advice in general that if there is a fire burning, you try to put it out first and then you think about the fire code," he said.

"Going forward, we have to look at the fire code – we have to think about what is the right balance of regulation, markets that will give us a powerful innovative financial system but one that will be safer to use."

Bernanke also said the way in which governments respond to the financial crisis racking the global economy would determine the timing and strength of recovery.

"For almost a year and a half the global financial system has been under extraordinary stress – stress that has now decisively spilled over to the global economy more broadly," he said. "The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial."

Bernanke said the Fed still has "powerful tools" that could be expanded to spur a rebound even though it has cut benchmark interest rates to near zero.

The Fed has chopped interest rates from 5.25 percent since September 2007 and has opened a range of lending facilities to stabilised markets and stimulate growth. The US economy has been in recession since December 2007.

Bernanke said the Fed would make clear its intention to keep the benchmark federal funds rate low for an extensive period to combat the crisis, but stressed that that policy could change if conditions improve.

The Fed's unprecedented expansion of its balance sheet is calibrated to stabilised credit markets, he said. The Fed's strategy does not lend itself to targeting the quantity of excess bank reserves or the monetary base, Bernanke said.

"The Federal Reserve's credit-easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for businesses and households," he added.

While there are risks to aggressive easing of monetary policy, Bernanke said inflation is not an immediate concern.

"Overall inflation has declined significantly and appears likely to moderate further," he said.

- Reuters