The Federal Reserve on Friday reassured investors it would take any steps needed to shelter the U.S. economy from a global credit squeeze, while President George W. Bush promised to help struggling homeowners refinance their mortgages.
Chairman Ben Bernanke also said the central bank would not bail out investors who had made mistakes, but overall his comments reinforced the view that the Fed will cut interest rates by a quarter percentage point at its meeting on September 18.
Bush urged lenders to work with homeowners to renegotiate their mortgages to prevent default and called on Congress to approve legislation that would provide mortgage insurance to borrowers through a network of private-sector lenders.
It's very light on detail and limited in scope, Jeff Schappe, chief investment officer at BB&T Asset Management in Raleigh, North Carolina, said of Bush's proposal. The important news today is that Bernanke is saying the Fed is going to do whatever it will take to limit the impact.
Rising default rates on home loans to less credit-worthy
U.S. borrowers, coupled with falling house prices, have caused losses for banks and funds holding mortgage-linked securities in recent months and fostered the worst global credit and liquidity squeeze in a decade.
The Federal Reserve, the European Central Bank, the Bank of Japan and other central banks have injected extra liquidity in recent weeks to try to stop the credit squeeze impacting global economic growth.
Investors have been pinning their hopes on an interest rate cut by the Fed at its next policy meeting on September 18 to shore up U.S. economic growth and alleviate the credit squeeze.
All three major U.S. stock indexes rose more than 1.0 percent on Friday, supported by the Bush and Bernanke statements, which also helped boost European stocks earlier in the day.
Bernanke said the Fed would act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.
But analysts believe the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.
The benchmark U.S. 10-year U.S. Treasury note lost 5/32 in price for a yield of 4.53 percent, versus 4.51 percent late on Thursday, as the need for a safe-haven investment dissipated.
International Monetary Fund First Deputy Managing Director John Lipsky said on Friday that market turmoil would dent but not derail world growth, though it was too soon to declare the troubles over.
Central bank action so far has been appropriate but market turbulence has not fully receded, Lipsky told Reuters on the sidelines of a gathering of central bankers and economists in Jackson Hole, Wyoming.
There were plenty of signs the crisis was far from over.
Rates for three-month sterling hit their highest in 8-1/2 years, while Australia's central bank struggled to ease upward pressure on some market interest rates as renewed trouble in the global commercial paper market made institutions reluctant to lend.
Deutsche Bank has shut down its London proprietary credit trading desk and is laying off some of the team, a source familiar with the matter said.
Earlier this month a source close to the bank said Deutsche was set to ditch its credit relative-value trading strategy, used by the London desk, after losses of about $135 million.
Deutsche Bank declined to comment and has said nothing so far about any losses stemming from credit market tremors.
BritIsh bank Barclays Plc, meanwhile, turned to the Bank of England as the lender of last resort for the second time this month after a technical breakdown in the British clearing system, a source close to the matter said.
Barclays declined to confirm it had used the borrowing facility but said in a statement it was flush with liquidity.