You don’t need to worry about the financial crisis in Cyprus sparking trouble for the U.S., according to Federal Reserve Chairman Ben Bernanke.
European officials’ marathon efforts this week to head off a collapse of the tiny island nation’s banking system have raised fears that the renewed turmoil in the euro zone could threaten the gathering momentum in the U.S. housing and job markets.
But Bernanke said that’s not likely.
“We are monitoring very carefully but at this point we’re not seeing major risk to the U.S. financial system or the U.S. economy,” he told reporters Wednesday.
Cypriot bank depositors woke Saturday to news that Europe’s latest, $13 billion bailout to keep their government afloat came with a nasty price tag: a “tax” of as much as 10 percent of their savings. Cypress lawmakers rejected the proposal, but banks there remain closed until at least next Tuesday to head off what some fear is an inevitable run on deposits.
That would drive the country’s banking system even further into what Bernanke described as “a deep financial hole.”
Bernanke said the current stems largely from the size of the Cypriot banking system relative to its economy.
At the end of January, bank assets in Cyprus totaled more than $160 billion – more than six times the country’s a gross domestic product of less than $25 billion – roughly the size of Vermont’s economy. (By comparison, U.S. bank assets of roughly $13 trillion are less than total U.S. economic output of more than $15 trillion.)
So while the situation remains painful for Cyprus, and complicates Europe’s efforts to resolve its long-running crisis, it poses little threat to U.S. banks, said Bernanke.
“The only way that they would create a problem would be if the runs became contagious in some sense and if depositors in other countries lost confidence,” he said. “But to this point, I'm not aware of any evidence that that is, in fact, the case.”
Some investors have also wondered aloud whether the financial turmoil in Europe could throw cold water on a red-hot Wall Street rally that has sent stock prices soaring to new records.
Since last summer, the drumbeat of dire headlines about the imminent collapse of the euro has subsided. But the euro zone economy has slid into recession, and the political divide between relatively well-off countries in the north and their struggling southern neighbors has widened.
The recent upheaval in Cyprus is a reminder that investors may have been lulled into thinking the crisis is over, according to Scott Minerd, chief investment officer at Guggenheim Partners.
The Fed’s complacency, he said, is “probably is a warning sign that we should start lightening up our portfolios.”
Bernanke told reporters that investors seem to agree with him that Cyprus doesn’t pose a problem.
"The markets are up today,” he said. “I don't think the impact has been enormous.”
Bernanke’s press conference followed a two-day meeting of Fed policy makers in which the central bankers pledged to continue their aggressive, $85-billion-a-month shopping spree for U.S. government and mortgage debt. The strategy, which is designed to keep interest rates at record low levels to spur purchases and investment, seems to be working.
Ultra-low mortgage rates have sparked a gathering revival in the long-moribund housing market. Though hiring remains weak compared to past recoveries, it has picked up markedly in the past six months. Fed officials have pledged to continue their easy-money policy until the unemployment rate – now 7.7 percent – falls to 6.5 percent.
That’s not expected until at least 2015, according to the Fed’s latest economic outlook, which was roughly in line with the previous forecast issued in December.
The Fed’s unprecedented policy – never tried before in its 100-year history – has swollen its holdings to some $3 trillion of debt, a level that some critics argue will present huge headaches when the central bank ultimately reverses course and begins selling those assets.
Others worry that the massive cash infusion to the economy, which followed the worst financial collapse since the Great Depression, could be sowing the seeds of another round of inflation.
Bernanke gave some hint in Wednesday’s press conference to the Fed’s current thinking about its “exit strategy,” the point at which it begins selling bonds and letting rates rise again.
The chairman said his central bank colleagues expect there will be a “considerable interval” between the time it needs to pull its foot of the gas (ending its easy-money bond buying) and begin to tap the brakes (nudging interest rates higher.)
And it could take awhile to strike the right balance. Just because they stop buying bonds one month or start selling them in another doesn’t mean they won’t change course depending on the impact on the economic outlook and the latest reading on inflation.
"When we see that the situation has changed in a meaningful way,” Bernanke said, “we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook.”