US crisis tests Fed boss Bernanke

US crisis tests Fed boss Bernanke
Article from: Reuters
By Ros Krasny in Chicago

March 19, 2008 08:49am

THE future job prospects of Federal Reserve chairman Ben Bernanke could hang in the balance as the US central bank wrestles with the biggest global financial market crisis in decades.

The Fed, under Mr Bernanke's guidance, has pulled out the stops in the past couple weeks to push liquidity into shaky credit markets. It has also cut benchmark lending rates from 5.25 per cent to 3.0 per cent since mid-September, with another big rate cut on tap at a policy meeting on Tuesday.

A number of prominent economists, including National Bureau of Economic Research President Martin Feldstein, think the Fed was too slow to respond to the global credit crisis that erupted in August last year and has been swirling ever since.

Ethan Harris, economist at Lehman Brothers, said in a research note that Mr Bernanke has taken a criticism from those who think the Fed has cut rates too much, and those that think they've eased too little.

But Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, gave Mr Bernanke "very high marks" for the credit-market rescue efforts now under way.

"He has done a good job at marshalling the forces and attacking the problems. If there's any finger-pointing, you could point them at the person who left the Fed in February of 2006," Mr Rupkey said, referring to former Fed Chairman Alan Greenspan.

Others commended Mr Bernanke's creative approach and innovation solutions to a liquidity crisis that has undercut the impact of traditional monetary policy tools.

"The Fed has been trying to distinguish between macroeconomic risks (for which it lowers the federal funds rate) and liquidity concerns in financial markets," said Thomas Lam, senior Treasury economist at United Overseas Bank Group in Singapore.

Analysts said Mr Bernanke has been guided by his historical knowledge, especially of the Great Depression of the 1930s.

"The Bernanke Fed's actions to date are entirely consistent with the view that in the face of the credit crunch ... keeping the monetary spigots wide open and the banking system as liquid as possible offers the best chance of addressing systemic risk," said Ray Attrill, analyst at 4CAST.

The Fed's steps should gain traction over time, said economists at Deutsche Bank.

"We have heard many investors say that the Fed's rate cut actions are not working and that other measures need to be taken ... When the economy bottoms out and investors believe that the financial crisis is not spreading, there will be some light at the end of the tunnel," they said.

If anything, Mr Bernanke could take a higher public profile during these days of crisis, according to Mr Rupkey.

"People see the Fed chairman as the nation's chief economist, but it seems like the White House and (Treasury Secretary Henry) Paulson are taking the lead," he said.