While you were sleeping: Bernanke's cold water splash

Thursday 11th February 2010

Wary investors interpreted comments by Federal Reserve chairman Ben Bernanke about the eventual unwinding of emergency liquidity programs as a sign that US interest rates were poised to rise even though he said that wasn’t the case.

Traders said the reaction of some investors was bewildering given that the current environment of low interest rates was intended to see the markets through the peak of the credit crisis, which had passed.

What Bernanke did say was that the Fed might first raise the rate that the central bank pays on banks’ deposits as part of a return to a more normal lending strategy but that consumers and business need not worry.

“Although at present the US economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.

“We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively,” Bernanke said in written testimony to the House Financial Services Committee.

“Before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate.

“These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalisation of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy.”

In early afternoon trading, the Dow Jones Industrial Average had declined 0.38%, the Standard & Poor’s 500 Index was down 0.43% and the Nasdaq Composite had slid 0.55%.

Financial stocks advanced, helping to offset declines in Sprint Nextel, Dean Foods and Micron Technology. Dell, Baidu and Adobe were higher.

The Chicago Board Options Exchange Volatility Index, or VIX, fell 0.35% to 25.91.

Before Benanke’s testimony was released, there was a general sense of relief that the European Union was preparing to step in to assist Greece with its deficit woes. A video conference of the euro-zone’s 16 finance ministers was scheduled for today, Reuters reported.

As for Europe, the Dow Jones Stoxx 600 increased 0.6% to 240.69. The FTSE 100 rose 0.39%, Germany’s DAX gained 0.69% and France’s CAC 40 advanced 0.63%.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.46% to 80.12.

The euro fell 0.7% to US$1.3697 at 11.15am in New York, from US$1.3797 yesterday, when it rose as much as 1.4%, the most since September 8. The yen was at 89.83 per dollar, from 89.69, and gained 0.6% versus the euro to 122.99, from 123.75.

Sterling fell as much as 0.9% after Bank of England Governor Mervyn King said it’s “far too soon” to say whether officials had halted their bond-purchase program, according to Bloomberg.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.25% to 264.47.
Oil fell after the Organisation of Petroleum Exporting Countries forecast lower global consumption this year.

U.S. crude futures were trading at US$72.91 a barrel, US84 cents down, after earlier hitting US$74.30. ICE Brent crude futures fell US$1.11 to US$71.01.

Oil came under further pressure from a large increase in crude inventories in the United States and a fall in Chinese crude imports, Reuters said.

Chinese crude imports slid in January, to 4.03 million barrels per day from their December peak of 5 million bpd, although they were still up 33% on the year.

Crude stocks in the United States, the world's largest oil consumer, increased by 7.2 million barrels to 337.6 million barrels in the week to February 5, industry group American Petroleum Institute (API) said late on Tuesday.

Gold futures for April delivery lost US$9.90, or 0.9%, to US$1,067.30 an ounce on the New York Mercantile Exchange’s Comex unit at 10.44am. Gold for immediate delivery in London was 1.1% lower at US$1,066.68.

Businesswire.co.nz

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