Bernanke: Financial markets better, but still 'far from normal'
April retail sales show some strength
WASHINGTON - Financial markets are starting to work better, Federal Reserve chairman Ben S. Bernanke said yesterday, but are still not functioning normally despite Fed intervention. Meanwhile, new data on retail sales suggests American consumers, though stressed, are not cutting their spending in a dramatic way.
The twin pieces of news reflect an apparent easing of the financial crisis in recent weeks. Money is flowing again through markets for debt that had seized up in March. And data on the economy, including yesterday's, suggest that the economic downturn the nation is experiencing is, so far at least, not the severe recession many had feared.
Bernanke, in a speech delivered by satellite to a conference of the Atlanta Fed in Sea Island, Ga., noted that safe mortgage-backed securities are now trading at more normal prices, and that companies that borrow money are now able to get more favorable interest rates. Those are both indicators that some healing is occurring in the complex network of debt markets that grease the gears of a modern economy.
But Bernanke, taking a more dour tone than Treasury Secretary Henry Paulson and some Wall Street executives about the prognosis for an end to the financial crisis, said that "conditions in financial markets remain far from normal."
Markets for packages of loans "remain moribund," he said. And he noted that the rates at which banks lend to one another are still "abnormally high," a reflection of banks' desire to hoard cash.
"He's saying that it ain't over," said Doug Roberts, chief investment strategist at Channel Capital Research. "He's trying to make very, very clear that this is a continuing issue that will take a while to resolve."
Bernanke was not trying to signal any new direction in policy, however. The Fed, at its last policy-making meeting April 30, gave signs it is disinclined to cut interest rates further anytime soon. Economic data in recent weeks, and the improved conditions in financial markets, has supported that view, too. Options markets now price in an 81 percent chance that the Fed will not make any change to the federal funds rate it controls at its June 24-25 meeting.
Part of the reason that financial markets have been healing, and that the Fed is likely to refrain from further interest rate cuts, is that the economy is not performing as badly as had been suggested by economists' most dire forecasts this past winter.
That was underscored yesterday in a report on April retail sales.
The Commerce Department said sales declined by 0.2 percent in April. But when the volatile motor vehicle segment is excluded, sales rose by 0.5 percent.
And sales were strong in most categories of spending, excluding automobiles, gasoline and furniture.
"The April retail sales figures overall were not too bad in view of widespread reports of extremely grumpy consumer sentiment," Brian Bethune, an economist with consulting firm Global Insight, said in a report.
"Overall, consumer spending continues to chug forward, albeit at very slow rates," he added. 