|
Fed's
Mixed Blessing
Has
Bernanke's success in calming markets clouded investors' view
of the long road ahead?
By Colin Barr
June
12, 2008
 For
a guy who supposedly has lost his credibility, Fed chief Ben
Bernanke has been surprisingly effective in soothing stressed-out
financial markets—maybe a little too effective.
Since
the credit crisis began unfolding last summer, Bernanke has
taken brickbats from all angles. When the Fed held interest
rates steady back in August, some critics claimed Bernanke
was "behind the curve" and that his failure to act
quickly would lead to a deep recession. Once the Fed began
cutting interest rates starting in September, others warned
that the Fed was overreacting and risked fueling inflation
with its monetary laxity. When the New York Fed led a rescue
of Bear Stearns, and the Fed began lending more freely to
financial firms to prevent another bank run, there were doubts
about the prudence of the decision to make loans using riskier
nongovernment securities as collateral.
Yet for
all the questions about the Fed's on-the-fly policymaking,
Bernanke seems to have succeeded in calming down the markets.
Stocks have rallied off their mid-March panic lows, and the
spreads between risk-free Treasuries and private investments
have narrowed sharply. "The Fed has been very creative,"
says Jeff Miller, CEO of investment adviser New Arc Investments
in Naperville, Ill. He credits the Fed's rate cuts and its
expanded lending to banks as having "stopped the spiral"
of financial-sector problems that threatened to deliver a
shock to an already slowing economy.
The question
now is whether investors have taken too much comfort in the
Fed's ability to keep markets functioning. While the Fed's
willingness to lend to financial institutions should prevent
another Bear Stearns-like calamity, some observers believe
the last two months' rally reflects a rosier view of the markets
and the economy than is warranted.
"A
lot of complacency has come back into the market," says
David Merkel, chief economist at broker-dealer Finacorp Securities.
He points to the narrowing spread between the yields on two-year
Treasury notes and A2/P2 commercial paper, the short-term
borrowings of corporations deemed a satisfactory risk by Standard
& Poor's and Moody's.
That
spread was 190 basis points in March, as investors were fleeing
privately issued debt ahead of the near collapse of Bear Stearns,
and as much as 260 points back in December, shortly before
Bank of America agreed to buy distressed mortgage lender Countrywide.
This week, the spread was 46 basis points, Merkel says. That
means roughly that companies with low-A to high-triple-B credit
ratings can borrow in the market for 90 days at about 3%—what
he terms a relatively attractive rate.
The spread
has narrowed even as the U.S. has continued to add jobs at
an anemic rate while losing high-paying manufacturing jobs.
At the same time, oil prices have surged. The minutes of the
Federal Reserve's April 29–30 meeting notes that recent
economic data "continued to suggest that a substantial
softening in economic activity was under way." The Fed
said members of the Federal Open Market Committee expect a
contraction in U.S. gross domestic product in the first half
of 2008, with only modest growth returning in the second half
as consumers cash and spend the fiscal stimulus checks the
government started sending out this spring.
1
| 2
Next
Page>
|
Print