Bernanke indicates Fed to act 'as needed' to steady economy

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WASHINGTON, Aug 30 (AFP): Federal Reserve chairman Ben Bernanke said in a letter to a US senator that the central bank would act "as needed" to ease the impact of a credit squeeze on the US economy.
The letter by Bernanke, dated Monday, was in response to two letters from Senator Chuck Schumer earlier this month expressing concern about the impact of tighter credit.
"I want to assure you that the Federal Reserve, in cooperation with other federal agencies, is closely monitoring developments in financial markets," Bernanke wrote.
Bernanke indicated that the Fed had already taken steps to increase liquidity in the markets by cutting the discount rate for direct loans to banks by the Fed.
The central bank chief added that the Fed "is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
The comments were the first from Bernanke since the Fed on August 17 cut its discount rate by half a point to 5.75 per cent to get credit flowing.
Many analysts say the Fed may need to cut its key federal funds rate, currently at 5.25 per cent, to lower overall borrowing costs, to restore confidence in credit markets.
Bernanke was to address a symposium Friday in Jackson Hole, Wyoming, in a speech on the housing market and monetary policy, comments that will be keenly watched by financial markets.
Bernanke's letter said the Fed and its regional banks were working with lenders to avert foreclosures where feasible for homeowners who have trouble making payments when adjustable-rate loans are "reset" with higher rates.
"It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance," he added.
"Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms."
Bernanke said the big government-sponsored mortgage finance firms like Fannie Mae "are not constrained" by portfolio caps and could bring more cash into the housing market by selling some of their existing loans.