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Fed ‘cautiously upbeat’ bourses will stabilise

TOKYO – UNITED States Federal Reserve officials are cautiously optimistic that the steps they have taken to relieve a squeeze in credit markets are working, The Wall Street Journal reported yesterday.

It added that the Fed may wait until its next policy meeting before considering a cut in the federal funds rate.

The paper said Fed officials acknowledged that conditions are far from calm and could take a turn for the worse. But a pickup in issuance of jumbo mortgages and steadying stock markets were evidence of improving conditions.

‘As long as Fed officials think things are getting better, they are less likely to feel pressured to cut interest rates immediately and are more likely to wait until their scheduled meeting on Sept 18 to decide,’ the Journal reported on its website without citing sources.

The article was written by the paper’s Fed reporter Greg Ip, who is known for sometimes reflecting the thinking of senior policymakers.

The Fed cut its discount rate, for banks borrowing directly from the central bank, last Friday and has pumped extra funds into the market to help relieve the crunch from fears about banks and funds suffering losses from US sub- prime mortgages.

A cut in the fed funds rate target would be a fresh test of Fed chairman Ben Bernanke’s credibility. He received a nudge from Congress on Tuesday, after a meeting with Senate Banking Committee chairman Christopher Dodd.

At a press conference after the meeting, Mr Dodd said the central bank chief agreed to use ‘all of the tools at his disposal’ to restore stability in markets roiled by the sub-prime mortgage crisis.

He added that he did not ask Mr Bernanke to cut the fed funds rate and that the Fed chief did not pledge to do so.

Strategists at Barclays Bank concluded: ‘Mr Dodd emphasised that he does not want to put pressure on the Fed or interfere with policymaking by the Federal Open Market Committee (FOMC). But his comments and the scheduling of the meeting itself revealed that the FOMC is facing some degree of political pressure.’

A pre-emptive Fed move would plunge Mr Bernanke waist-deep in a ‘moral hazard’ morass: the sense that the Bernanke Fed, like its predecessors, will step in to bail out financial dealers who have badly over-reached on the greed versus fear scale.

On Tuesday, Richmond Fed Bank president Jeffrey Lacker poured cold water on the chances of an imminent rate cut, saying on Tuesday in a speech at a conference that market turmoil warranted a change in rates only if it affected the outlook for inflation or growth.

Source: REUTERS (The Straits Times 23 Aug 07)

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