By Kristina Cooke
NASHVILLE, Tenn, April 18 (Reuters) - Political furor over lavish bonuses paid to executives at institutions bailed out with U.S. taxpayer funds is making investors wary of emergency programs and will hamper consumers' ability to borrow at reasonable rates, a top Federal Reserve policy-maker said on Saturday.
The effectiveness of some of the U.S. central bank's emergency lending programs has been 'undercut by stigma or worries about what other strings are or might be attached' to their use, William Dudley, president of the Federal Reserve Bank of New York, said at a conference at Vanderbilt University in Nashville.
The U.S. central bank's most ambitious lending program to date, the Term Asset-Backed Securities Loan Facility, which aims to spur consumer and small business lending, has been suffering from such concerns, he said.
The program kicked off in March, shortly after a furor erupted over bonuses paid to executives of American International Group, the insurer that has received billions in government bailout funds, and investors have worried they could become the focus of the political anger.
'I think it is worth emphasizing actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates,' Dudley said.
In the first two rounds of TALF, investors requested less than $7 billion in loans, a program that the Fed has said could grow to $1 trillion.
'One reason why the TALF has gotten off to a relatively slow start is the reluctance of investors to participate,' Dudley said, noting that some investors worry they could become subject to scrutiny on their pay similar to that on banks receiving bailout money through the Troubled Asset Relief Program.
'My own view is that these fears are misplaced. The TARP funds in the TALF program only come in on the back end of the program when loans are put back to the Fed,' said Dudley, who prior to becoming the New York Fed's president ran the bank's markets group.
But, even with the tepid start, the TALF has helped restart securitization markets, Dudley said.
In general, the Fed's unprecedented array of liquidity programs have 'worked quite well. In those areas where the facilities have been active, we generally have seen an improvement in market conditions,' Dudley said.
They are not, however, a panacea as they cannot address the what he said is the 'fundamental problem': a shortage of capital in the banking system.
NOT WORRIED ABOUT INFLATION
Although the Fed's balance sheet has more than tripled to over $2 trillion as the central bank set up emergency facilities since the financial crisis took hold, Dudley said the ballooning balance sheet is unlikely to lead to runaway inflation down the road.
'I am not worried at all that the Federal Reserve's balance sheet expansion will generate an inflation problem,' he said, noting that many of the programs will automatically wind down as soon as markets normalize and better prices can be found elsewhere.
But Dudley, answering audience questions, said the number of emergency facilities would make the exit strategy more complex.
He said as many facilities are authorized under the Federal Reserve Act, they are only able to stay in place under 'unusual and exigent' circumstances. The most difficult decision in this case will be to determine when circumstances are no longer unusual or exigent.
Some of the longer-term assets may be harder to sell or offset, he said. In response to a question from former Fed Chairman Paul Volcker about the implications of this on monetary policy, Dudley said: 'We think we can manage monetary policy with excess reserves in the banking system.'
The Fed's ability, since last September, to pay interest on excess reserves will make it easier for the central bank to tighten monetary policy and private sector interest rates when the time comes, Dudley said. He said the central bank has many options to make it worth banks' while to hold reserves at the Fed.
(Additional reporting by Ros Krasny; Editing by Leslie Adler) Keywords: USA FED/DUDLEY (kristina.cooke@reuters.com; 646 223 6154) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NASHVILLE, Tenn, April 18 (Reuters) - Political furor over lavish bonuses paid to executives at institutions bailed out with U.S. taxpayer funds is making investors wary of emergency programs and will hamper consumers' ability to borrow at reasonable rates, a top Federal Reserve policy-maker said on Saturday.
The effectiveness of some of the U.S. central bank's emergency lending programs has been 'undercut by stigma or worries about what other strings are or might be attached' to their use, William Dudley, president of the Federal Reserve Bank of New York, said at a conference at Vanderbilt University in Nashville.
The U.S. central bank's most ambitious lending program to date, the Term Asset-Backed Securities Loan Facility, which aims to spur consumer and small business lending, has been suffering from such concerns, he said.
The program kicked off in March, shortly after a furor erupted over bonuses paid to executives of American International Group, the insurer that has received billions in government bailout funds, and investors have worried they could become the focus of the political anger.
'I think it is worth emphasizing actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates,' Dudley said.
In the first two rounds of TALF, investors requested less than $7 billion in loans, a program that the Fed has said could grow to $1 trillion.
'One reason why the TALF has gotten off to a relatively slow start is the reluctance of investors to participate,' Dudley said, noting that some investors worry they could become subject to scrutiny on their pay similar to that on banks receiving bailout money through the Troubled Asset Relief Program.
'My own view is that these fears are misplaced. The TARP funds in the TALF program only come in on the back end of the program when loans are put back to the Fed,' said Dudley, who prior to becoming the New York Fed's president ran the bank's markets group.
But, even with the tepid start, the TALF has helped restart securitization markets, Dudley said.
In general, the Fed's unprecedented array of liquidity programs have 'worked quite well. In those areas where the facilities have been active, we generally have seen an improvement in market conditions,' Dudley said.
They are not, however, a panacea as they cannot address the what he said is the 'fundamental problem': a shortage of capital in the banking system.
NOT WORRIED ABOUT INFLATION
Although the Fed's balance sheet has more than tripled to over $2 trillion as the central bank set up emergency facilities since the financial crisis took hold, Dudley said the ballooning balance sheet is unlikely to lead to runaway inflation down the road.
'I am not worried at all that the Federal Reserve's balance sheet expansion will generate an inflation problem,' he said, noting that many of the programs will automatically wind down as soon as markets normalize and better prices can be found elsewhere.
But Dudley, answering audience questions, said the number of emergency facilities would make the exit strategy more complex.
He said as many facilities are authorized under the Federal Reserve Act, they are only able to stay in place under 'unusual and exigent' circumstances. The most difficult decision in this case will be to determine when circumstances are no longer unusual or exigent.
Some of the longer-term assets may be harder to sell or offset, he said. In response to a question from former Fed Chairman Paul Volcker about the implications of this on monetary policy, Dudley said: 'We think we can manage monetary policy with excess reserves in the banking system.'
The Fed's ability, since last September, to pay interest on excess reserves will make it easier for the central bank to tighten monetary policy and private sector interest rates when the time comes, Dudley said. He said the central bank has many options to make it worth banks' while to hold reserves at the Fed.
(Additional reporting by Ros Krasny; Editing by Leslie Adler) Keywords: USA FED/DUDLEY (kristina.cooke@reuters.com; 646 223 6154) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.