Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Bernanke put not quite what it seems
BackBack

Bernanke put not quite what it seems

Bernanke put not quite what it seems

Premium

Has the Fed come to the rescue of beleaguered financial markets? That was the first interpretation investors gave to the announcement that the US central bank was cutting its discount rate by half a percentage point, from 6.25% to 5.75%. Equity markets jumped by 2-3% and the Itraxx crossover credit spread index narrowed by 55basis points (bps). But the rejoicing may prove premature.

The discount window allows cash-strapped banks to borrow what they need at a punitive interest rate. The Fed has cut the penalty—the premium over the overnight Fed funds rate—in half, from one percentage point to 50bps. It has also lengthened maturities and broadened the collateral it will accept. During the years of cheap and ample liquidity, the discount window has hardly been used. But in the current squeezed markets, the Fed might find some takers for its offer of funds at 5.75%. Rates on second-tier commercial paper have leapt up to that level in the last week, from 5.4% in July.

Still, the market’s jubilation was caused more by the perceived symbolism of the move than by its likely effects on the credit markets. After all, the Fed has been providing banks with as much cash as they needed, and at much lower rates, all the past week.

Investors are taking the news as a sign that Ben Bernanke, who faces his first crisis as Fed chairman, will follow the pattern set by his predecessor Alan Greenspan. He, too, will come to the rescue of troubled investors. Welcome the Bernanke put.

But it looks like Bernanke is doing everything he can to avoid reigniting a frenzy of risk-taking in the markets. The Fed’s rate-setting committee met, but did not cut the overnight rate. Instead, there was a statement promising a response to economic—not financial—damage. And the Fed has tried to find a way to address the money markets’ pressing problems while ensuring that irresponsible bankers take some sort of punishment.

The Fed may yet capitulate to market pressure and cut the overnight rate. But it would still rather not.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 20 Aug 2007, 01:07 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App