The Federal Reserve has taken extreme measures over the past week in conjunction with the US Treasury, FDIC, and central banks around the world including the European Central Bank and Bank of England (among others). Indeed, the October 8 coordinated rate cuts were unprecedented, and on October 14, the US moved to recapitalize its financial institutions, similar to policies introduced by the UK last week. Will this prove to be the magic solution the markets have been looking for?
US Fed: Are Their Intervention Efforts Complete? The Federal Reserve has taken extreme measures over the past week in conjunction with the US Treasury, FDIC, and central banks around the world including the European Central Bank and Bank of England (among others). Indeed, the October 8 coordinated rate cuts were unprecedented, and on October 14, the US moved to recapitalize its financial institutions, similar to policies introduced by the UK last week. Will this prove to be the magic solution the markets have been looking for? While these actions should help to boost confidence in the near-term, the members of the Federal Reserve may find themselves cutting rates further as the US economy is likely to slow substantially, bringing down already-cooling inflation.
Ben Bernanke, Federal Reserve Chairman (Voting Member)
"As Americans well know, the challenges evident in the financial markets and in the economy are large and complex, but I believe that the steps taken today will help us to overcome them."
"As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets, which has had cascading and unwelcome effects on the availability of credit and the value of savings. The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses."
Richard Fisher, Federal Reserve Bank of Dallas President (Voting Member)
"At the beginning of the year, we were almost 100 percent in Treasury securities; now “other assets” and “term auction credit” represent roughly one-third or some $500 billion in our total assets. This reflects what I consider one of the most significant strides taken to address perhaps the most debilitating pathology of a credit crunch. I refer to "roll-over risk."...By providing a backstop source of funding, the Fed seeks to lower or eliminate roll-over risk."
Eric Rosengren, Federal Reserve Bank of Boston President (Non-Voting Member)
Recent events in financial markets, and weak incoming data, suggest that the economy is likely to grow well below its potential for the rest of this year. While the second quarter benefited from the Federal tax rebates of the "stimulus plan," and strong exports, these sources of growth do not appear to be carrying in to the second half."
"Well-functioning credit markets are essential for restoring economic health. These and other measures taken by the Federal Reserve should help restore confidence in credit markets, and allow the financial system to efficiently link borrowers and lenders in ways that promote economic growth."
Paul Volcker, Former Federal Reserve Chairman
"The first priority is to stabilize the financial system. It is necessary even though the cost involved is heavy government intrusion in markets that should be private...House prices in the U.S. are still declining. There are still more losses to come there. The economy, I believe, is in recession."
Called the US government's bailout efforts "distasteful" and "not consistent with a capitalistic system. But however distasteful, they are necessary to restore stability to the financial system."
**Related Article: US Recapitalization Plan - What Does It All Mean?
ECB: Was Last Week’s Rate Cut the First of Many? The European Central Bank – arguably one of the most hawkish central banks in the G10 – cut rates along with the Federal Reserve in a coordinated effort last week. This was a notable move because ECB President Trichet has long stuck with his ardent focus on maintaining price stability. With commodity prices down significantly from their record highs during the summer and global economic growth cooling, upside risks for inflation in the Euro-zone have pulled back. It will be interesting to see if they will adjust monetary policy accordingly, as the ECB’s press release last week suggests they are not eager to cut rates again anytime soon.
Jean-Claude Trichet, European Central Bank President
"Our judgment was that the upside risks for inflation had diminished. That's the reason why we decreased rates and you can continue to count on us to do whatever is necessary, any time."
Juergen Stark, European Central Bank Executive Board Member
"The ECB council has reason to believe that the inflation rate will get considerably closer to what we define as price stability in the second half of 2009 again. It is important...we sent a clear and powerful signal to markets: we are ready and in a position to act jointly if we deem it necessary."
"One can assume that we will see very weak growth at least for a period of several quarters."
Erkki Liikanen, European Central Bank Governing Council Member
"We know that the end of the year will be quite subdued. Before the rebound takes place it will be perhaps later next year."
"When we are making monetary policy the target is to keep inflation below, but close to, 2 percent...The last weeks and days have shown that the expectations are settling there: (the) oil price is falling ... growth slows."
Miguel Angel Fernandez Ordonez, European Central Bank Governing Council Member
"I don't think the focus is on changes in official rates, but rather the relation of monetary policy and market interest rates. Usually official rates and market rates move in the same direction, but now there is a big, important problem. We should put all our work in trying to recover confidence, because if not, even if we cut interest rates, the interest rates on the market will do nothing."
Christian Noyer, European Central Bank Governing Council Member
"Declining oil and commodity prices, together with stagnant activity, have significantly altered the inflation outlook. Based on current conditions, we can expect (the) 'instant' inflation rate to come under our definition of price stability somewhere in the middle of 2009."
**Related Article: Euro Rebounds as EU Summit Focuses On Debt Guarantees
Compiled by Terri Belkas, Currency Strategist for DailyFX.com Questions? Comments? E-mail: tbelkas@dailyfx.com