Businesses, banks and the Federal Reserve are under pressure to prove they can survive a financial crash, with US officials telling lawmakers that a lack of clarity over how the crisis will be handled is making it difficult for banks and businesses to do their due diligence.
Key points: The US Treasury has said it has proposed several solutions to the crisis, including increasing liquidity to keep the banking system solvent, but the US Federal Reserve has said that the Federal Deposit Insurance Corporation (FDIC) should step in more directly and has called for a review of its role in stabilising the financial system.
Federal Reserve Chairman Ben Bernanke said on Tuesday that the US was still “at the early stages of this crisis”, but he said the US would not be able to “reinforce” its “strong regulatory framework”.
“In the immediate future, it is unlikely that the FDCIC will have any direct involvement in stabilizing the financial systems of the United States and Europe,” Mr Bernanke wrote in a letter to Congress.
Mr Bernke said he was “confident that the United State and the European Union can continue to rely on the FDI [federal reserve’s] ability to support the recovery of financial markets”.
“I also believe that a continued focus on the banking sector will help to address the concerns that we have expressed in this regard,” he added.
“The Federal Reserve, the Federal Housing Finance Agency, and other central banks, as well as the International Monetary Fund, have expressed concerns about the stability of the banking and financial systems and the effectiveness of the Federal Funds rate.”
Mr Bernays letter to the US Congress also pointed out that some financial institutions are “too big to fail”.
He said the Federal Open Market Committee (FOMC) should have the final say on whether the Federal funds rate is too high.
“At this time, it would be inappropriate to recommend a rate increase,” he wrote.
“This would be contrary to the Committee’s view that the economy is growing and that the long-term rate should remain at a level consistent with the Committees long-run objectives.”
The US Congress has repeatedly raised questions about whether the FOMC should be allowed to take any action that would affect the rate at which it lends money to banks and other financial institutions, a process that could affect the US economy.
“Given that the Committee has not yet adopted its long-range policy framework for responding to the economic impacts of the financial crisis, I do not believe it is appropriate for it to have final say over whether a rate hike is appropriate,” Mr Fedanke wrote.
US lawmakers will meet on Wednesday and Thursday to discuss how to deal with the crisis.
What will the Fed do?
The Federal Reserve will not raise rates because the Federal government and banks have failed to respond to the crash in the US.
However, the Fed is planning to hold its benchmark interest rate at a range between 0.75 per cent and 0.8 per cent.
If the Fed increases the rate, the economy will start to fall behind other developed economies.
“Focusing on short-term economic outcomes is not the Fed’s job,” Mr Paulson wrote in the letter.
“It is not necessary to reduce the pace of monetary stimulus to achieve long-lasting macroeconomic stabilization.”
The Federal Deposit Association (FDCA) said it had no immediate comment on Mr Bernakys letter.