Bernanke Says Fed to Monitor Dollar
By Scott Eden Reporter
11/16/09 02:32 PM EST
Updated to include further detail from the Fed Chairman's speech and Q&A session Monday.
NEW YORK (TheStreet) -- Federal Reserve Chairman Ben Bernanke said the Fed would monitor the weakening U.S. dollar "closely," but reiterated that the central bank's twin mandate of maximum employment and inflation prevention remained on its front burners.
"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," Bernanke said Monday afternoon. "Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability."
The Fed chief made his remarks in a speech to the Economic Club of New York. Comments about the greenback are typically in the bailiwick of the Treasury Department, but the recent pressure on the dollar, which has lifted commodities prices sharply higher in recent weeks, has been an area of focus among market participants.
Still, Bernanke said that because resource slack in the economy remains high, "inflation seems likely to remain subdued for some time." For that reason, the Fed will keep interest rates at their historically low levels "for an extended period," he said, reiterating a phrase the central bank has used since the crisis began.
Ben Bernanke
As for the labor market, Bernanke noted that the economy needs to create 100,000 jobs each month just to account for the young people who are entering the labor force for the first time. Thus, the unemployment rate next year will decline slowly "if economic growth remains moderate, as I expect," he said.
In a question-and-answer session after the chairman's prepared remarks, Bernanke added some detail to his view of the economy, saying the Fed didn't see any large asset-value "misalignments" in the U.S. financial system right now. He noted, however, that the Fed had started using asset-value models as a way to keep an eye on any potential asset bubbles.
Bernanke also addressed concerns close to the hearts of Wall Street bankers and traders -- namely, whether the U.S. should reinstate some form of Glass-Steagall, the Depression-era law that prevented securities trading and bank lending from occurring under a single firm's roof.
Former Fed Chairman Paul Volker, who held the post during the Black Monday market crash of 1987, has been a vocal proponent of separating a bank's lending activities from the so-called proprietary trading desks that have become the cash cows of many Wall Street bulge-bracket firms, most notably Goldman Sachs
(GS:NYSE)
.
Bernanke, referring briefly to Volker and his stance on the subject, said, "There's a sense here of returning to Glass-Steagall. I think that kind of movement wouldn't be constructive."
He said he wasn't in favor of a drawing a "bright line" between a firm's trading and lending businesses, arguing that such trading provides an important hedging tool that helps mitigate the risks inherent in a firm's lending practice. Further, he said, in the most recent crisis, "plenty of firms" got into trouble because of bad loans as well as soured trades. Separating the two functions, therefore, may not have done much good.
But, he said, because speculation can indeed get out of hand, helping to create asset bubbles, the U.S. does need to step up its regulatory oversight of firms' trading and be permitted, on a case-by-case basis, to "force institutions to cut back on these activities" if the regulator believes a firm has pushed the envelop too far.
In the wake of banking deregulation, JPMorgan Chase
(JPM:NYSE)
, Citigroup
(C:NYSE)
, Bank of America
(BAC:NYSE)
and Wells Fargo
(WFC:NYSE)
all have paired huge securities businesses with commercial banks. Moving in the other direction, Goldman Sachs and Morgan Stanley
(MS:NYSE)
, the whitest-shoe firms on the street, became bank holding companies in order to obtain FDIC backstops following the financial meltdown last year.
Bernanke also addressed the too-big-to-fail nature of this crowd (all of whom, of course, expanded enormously post Glass-Steagall). The Fed chief said it was "absolutely critical" to develop some kind of third way, or "special regime," to deal with financial firms teetering on the brink of failure.
That is, for firms that pose systemic risk, there must be a method put in place for unwinding them without resorting to a government bailout or a standard bankruptcy that would likely spook markets and endanger the economy. The root cause of the financial crisis won't be solved, he said, "until we can allow banks the freedom to fail."
-- Written by Scott Eden in New York
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