WASHINGTON — The Federal Reserve will do whatever is necessary to prevent damage to the economy from the credit crunch that has gripped Wall Street, a Fed official said Monday, warning it will take time for financial markets to fully recover from the strains.
Fed Governor Randall Kroszner's remarks came as fears about the credit crunch and a painful housing slump have gripped investors in recent months, causing stocks to nosedrive. Wall Street took another sharp plunge — 366 points — on Friday. The Dow Jones industrials were down again in trading Monday, though not as sharply as Friday.
"The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability," Kroszner said in a speech here to the Institute of International Bankers.
It is the same pledge that Federal Reserve Chairman Ben Bernanke and other central bank colleagues have been making in the past months. That is, to keep the economy growing and inflation under control.
Some economists believe the Fed will lower an important interest rate at the end of a two-day meeting next Wednesday, to help bolster economic activity. But others, citing the economy's resiliency and worries about an inflation flareup, think the Fed will leave rates alone. Oil prices, which had surged to record highs in recent weeks, have eased a bit but are still hovering above $86 a barrel.
It's a delicate situation facing the Fed.
To prevent the ill effects of the credit crunch and housing troubles from sinking the economy, the Fed in September sliced a key interest rate by a bold one-half percentage point to 4.75 percent. It was the first rate cut in more than four years.
Before that aggressive move, the Fed had taken other actions to deal with the credit crises, which had taken a turn for the worse in August. The Fed pumped billions of dollars into the financial system to help banks and other institutions get over the credit hump. It also reduced its lending rate to banks.
"I should emphasize that the purpose of these actions was not to insulate financial institutions from the consequences of their business decisions, but rather to facilitate the orderly function of markets more broadly in the face of risks to the overall economy," Kroszner said.
"I believe that this provision of liquidity has contributed, at least in part, to the recent improvements, we have seen in the functioning of financial markets," he added.
Still, the financial situation is fragile, and it will take time for the markets to fully recover. "Strains ... persist even now," Kroszner said.
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