Bernanke: Credit Crisis Isn't Over Yet

Federal Reserve Chairman Ben Bernanke said Tuesday that credit market conditions have improved, but "at this stage conditions in financial markets are still far from normal."

In a televised speech to the Atlanta Fed's annual conference in Sea Island, Ga., Bernanke said that financial institutions must address the "fundamental sources of financial strains" in Wall Street's credit crisis through a process of deleveraging, raising new capital and improving risk management.

That said, he noted that credit spreads in key markets have narrowed in a sign that confidence has returned after the depths of the crisis in mid-March when the Fed orchestrated the fire sale of Bear Stearns BSC, the nation's fifth-largest investment bank, to JPMorgan Chase JPM to avoid a bankruptcy that threatened a systemic financial meltdown.

"To date, our liquidity measures appear to have contributed to some improvement in financing markets," said Bernanke, adding that "once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed."

Bernanke didn't send any signals about the direction of policy for the central bank's open market operations, which set the federal funds rate target -- a key, short-term interest rate for interbank lending that reflects changes in the money supply. Currently, fed funds futures show that the market expects the Fed to keep its rate target steady at 2% at its June meeting.

The Fed has slashed its fed funds target by 325 basis points since the outbreak of the credit crisis last summer. Its actions have been the subject of intense controversy as the economy has continued to show signs of a slowdown amid rising signs of inflation, especially in food and energy prices. Crude oil futures prices have rocketed up above $125 a barrel, sending gasoline prices soaring, and the value of the dollar has plunged.