Ben Bernanke, the head of America’s central bank, on Friday night gave a boost to shares on both sides of the Atlantic when he said the fight against inflation was being aided by falling commodity prices and the stronger dollar.
London’s FTSE 100 index gained 2,5%, rising 135,4 points to 5 505,6, after the chairperson of the Federal Reserve said he saw the prospect of price pressures abating later this year and in 2009.
Shares on Wall Street also posted early gains, boosted by Bernanke’s speech, rumours of a bid for the troubled bank Lehman Brothers and comments from the veteran investor Warren Buffett that shares are ”more attractive” than they were a year ago.
Bernanke, speaking at a symposium in Jackson Hole, Wyoming, dampened hopes of further cuts in interest rates in the United States but dropped no hints that the Fed was about to increase the cost of borrowing in response to rising inflation.
”The Fed looks firmly on hold for many months, caught between ongoing inflation concerns, existing ‘relatively low’ rates and the financial storm he talks about,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
Bernanke called the combination of a financial storm and rising inflation ”one of the most challenging economic and policy environments in memory”, admitting that despite substantial cuts in the official cost of borrowing the turbulence had not abated. The effects of the credit crunch, he added, were now causing slower growth and rising unemployment.
He expected weak growth, lower commodity prices and a stronger dollar to help limit the increase in the cost of living in the world’s biggest economy.
”Nevertheless, the inflation outlook remains highly uncertain, not least because of the difficulty of predicting the future course of commodity prices, and we will continue to monitor inflation and inflation expectations closely. The Fed is committed to achieving medium-term price stability and will act as necessary to attain that objective.”
His remarks came as Buffett said there was little prospect of a pick-up in the US economy before next year and every chance that shareholders in the troubled mortgage groups Fannie Mae and Freddie Mac would be wiped out.
Speaking on CNBC television, Buffett said some businesses in his Berkshire Hathaway insurance and investment conglomerate were struggling as the economy suffered the after-effects of the credit binge earlier in the decade. ”You always find out who’s been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach,” he said.
Of the credit crunch, Buffett said: ”Right now the situation is still getting worse, and I would say that I don’t see any early end to that.”
He pointed out that Bernanke ”does not have any magic wand” to bolster an economy facing weak growth and mounting inflation. ”In my judgement it won’t be any better five months from now.”
Fannie and Freddie shares have plummeted as speculation grows about a government bail-out of the companies, which own or guarantee almost half of US mortgages. Shares of both have fallen more than 90% in the last year. The credit ratings agency Moody’s on Friday night downgraded stock in the lenders to its lowest investment grade amid reports that the US treasury was about to provide ”direct support” to them. The effective nationalisation of the two government-backed institutions would make shares almost worthless, Buffett said.
”They’re too big to fail. That doesn’t mean that the equity can’t get wiped out, and it almost has. In a practical sense, as institutions, they don’t have any net worth.”
Backstory
Freddie Mac and Fannie Mae play a pivotal role in the US financial system. They operate a secondary mortgage market, designed to increase the supply of money available for banks to lend to homeowners, and their collapse could provoke systemic failure in the financial markets. The government-sponsored firms buy mortgages from lenders, package them up and sell them on to financial institutions around the world. Freddie and Fannie, which own or guarantee $5,3-trillion of US mortgages, have had combined losses of more than $14-billion over the past year as increasing numbers of homeowners defaulted on their loans. Congress last month passed a bill that would allow the US treasury to lend money or buy shares in the organisations to keep them afloat. – guardian.co.uk