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Bernanke says stock markets ‘working well’

Federal Reserve Chairman Ben Bernanke says the administration and federal regulators are closely monitoring financial markets which appear to be “working well.”
/ Source: The Associated Press

Ben Bernanke isn’t a rookie anymore. He’s got a year under his belt as chairman of the Federal Reserve and he’s now endured his first market crisis.

Bernanke trooped to a crowded hearing room on Capitol Hill on Wednesday, the day after the market suffered its worst sell-off since the 2001 terrorist attacks, to deliver a simple message.

He said Fed officials were carefully monitoring the situation but so far had not seen anything worrisome in how the market had dealt with Tuesday’s sudden decline.

His performance won praise from the lawmakers, economists and, most importantly, Wall Street investors, who triggered a small rebound in stocks on Wednesday.

And unlike his predecessor Alan Greenspan, who would occasionally resort to his famously opaque speaking style to dodge questions he did not want to answer, Bernanke answered every question in a straightforward way that did not leave his listeners guessing.

House Budget Committee Chairman John Spratt, D-S.C., said in an interview after the hearing that Bernanke had given a credible performance by being careful to keep his comments “in the bounds of what he knows.”

Said Mark Zandi, chief economist at Moody’s “He did an excellent job. He exuded confidence.”

Zandi praised Bernanke for clearly delivering the key messages that the markets were functioning well and the Fed’s views on the economy had not changed.

That was important information because it let investors know the big stock sell-off had not exposed any problems at major banks or brokerage houses and the Fed did not expect the sudden loss of $632 billion in paper wealth to alter the economy’s performance in a major way.

On Wall Street, investors responded by pushing the Dow Jones industrial average up by 52.39 points to close at 12,268.63, a small gain but better than Tuesday’s 416-point loss.

Bernanke succeeded Greenspan, who had been Fed chairman for 18½ years, on Feb. 1, 2006. He told the House Budget Committee that there probably wasn’t just one cause for Tuesday’s sell-off.

The possible causes put forward by analysts have ranged from a record drop in China’s Shanghai index, a surprisingly weak manufacturing report in the United States and weekend comments by Greenspan that had raised the possibility of a U.S. recession by year’s end.

“There didn’t seem to be any single trigger of the market correction we saw yesterday,” Bernanke told the lawmakers, speaking in a slow, deliberate voice with his hands folded in front of him at the witness table.

Bernanke let the lawmakers know he wouldn’t be led into publicly contemplating what role Greenspan’s remarks or any of the other developments had played in setting off the worst one-day point drop since Sept. 17, 2001, after the terrorist attacks.

“I don’t think it would be useful for me to try to parse the movement into the components associated with different pieces of news or pieces of information,” he said.

Bernanke began his testimony before a standing-room crowd and with nearly two dozen lawmakers eager to question him.

However, the crowd dwindled as most lawmakers seemed more intent on discussing the looming budget problems in the government’s big benefit programs — Social Security, Medicare and Medicaid — than the market turmoil.

Bernanke noted that the government had reported earlier Wednesday that the overall economy, as measured by the gross domestic product, grew by just 2.2 percent at an annual rate in the final three months of last year.

While that was a sharp revision from the initial estimate of 3.5 percent, Bernanke said it was in line with the Fed’s expectations.

“There’s a reasonable possibility that we’ll see some strengthening of the economy sometime in the middle of the year,” Bernanke said, voicing the hope that the severe slump in housing and an effort by businesses to work off unwanted inventories would be less of a drag in coming months.

“We expect moderate growth going forward,” he said, sticking with the upbeat forecast he delivered to Congress two weeks ago.

Nariman Behravesh, chief economist at Global Insight, said there could be more market volatility in coming weeks, but he believed the economy would accelerate slightly as the year moved forward.

“The markets needed to hear a voice of calm and Bernanke succeeded in that role,” Behravesh said.

Bernanke’s comments on the stock market occurred at a hearing during which he also delivered virtually identical warnings as he had in January about the need to deal with looming budget problems in Social Security, Medicare and Medicaid.

At the White House, press secretary Tony Snow said Wednesday that President Bush had called Treasury Secretary Henry Paulson to get a readout on the stock market plunge.

Asked what advice the president would give to investors, Snow said, “The president does not give advice to investors in the stock market.”