Washington - Despite an easing of the tensions in international financial markets, the crisis is not yet over, Federal Reserve Chairman Ben Bernanke said on Tuesday. He told a meeting of the Federal Reserve Bank of Atlanta that improvements in financial markets "are welcome signs, of course, but at this stage conditions in financial markets are still far from normal." His comments contrasted with remarks by Treasury Secretary Henry Paulson, who said the worst of the crisis has passed.
If necessary, Bernanke said the Fed would expand its auctions to provide liquidity to banks, but cautioned that the central bank could not jump into to bailout every institution.
"A central bank that is too quick to act as liquidity provider of last resort risks inducing moral hazard," he said. "Specifically, if market participants come to believe that the Federal Reserve or other central banks will take such measures whenever financial stress develops, financial institutions and their creditors would have less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks."
The Fed and other central banks have responded to turmoil in the financial markets in recent months with billions of dollars in cash infusions.
Bernanke did not address the possibility of further lowering interest rates or the larger prospects for the US economy.
Last month, the Federal Reserve lowered its base interest rate by 0.25 percentage points to 2 per cent. Analysts expect it to hold off on further reductions.
