Filed under: Forecasts, Conventions and conferences, Economic data, Headline news, Federal Reserve, Recession
Federal Reserve Chairman Ben Bernanke addressed the Federal Reserve Bank of Atlanta Financial Markets Conference in Sea Island, Georgia this morning via satellite. He discussed in detail the current provision of liquidity by the Fed.
He discussed the shift in Fed monetary policy from its primary reliance on open market operations to lending tools used to address the credit crisis more directly. He mentioned the increased use of the Term Auction Facility (TAF) by commercial banks” from $20 billion at the inception of the program to $75 billion in auctions this month” and indicated that the Fed is willing to increase the use of these auctions as necessary.
He also discussed the extension of Fed credit to primary dealers through the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF). He mentioned that extending credit to primary dealers was an breathtaking move driven by the potential for a scenario “in which a cascade of failures and liquidations sharply depresses asset prices, with adverse financial and economic implications.” He indicated that even though improvements in the credit markets have occurred, there are still substantial problems that remain.
He addressed the issue of moral hazard by saying that although additional regulations should be implemented, the Fed must still take measures to resolve the current crisis. In essence, Chairman Bernanke was saying that the Fed will maintain a loose monetary policy until the crisis is resolved.
I believe that the current credit problems will take some time to resolve. Therefore, monetary policy will remain loose for much longer than many are expecting.
Thus, the current environment of real interest rates (interest rates adjusted for inflation) being negative will continue. This favors small-cap stocks. The odds of a small-cap rally increase as we spend more time in this environment and fear abates.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed(R) to Investment Success: The Effortless Strategy for Beating Wall Street.
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