Federal Reserve Chairman Ben Bernanke said Friday he has been “encouraged” by the market response to the Fed’s Wednesday announcement that it will buy a large amount of longer-term Treasury securities and greatly increase its purchases of agency and agency-guaranteed mortgage-backed securities.

Bernanke, in remarks prepared for delivery to the Independent Community Bankers of America’s convention in Phoenix, expressed hope for a “significantly brighter” economic and financial outlook.

And he urged bankers to make “prudent” but “opportunistic” loans to help speed economic recovery, even while repeating that there can be no recovery without a stabilization of the financial system.

On Wednesday, following two days of meetings, the Fed’s policymaking Federal Open Market Committee surprised many by announcing it will buy up to $300 billion of longer-term Treasury securities over the next six months. The FOMC also doubled to $200 billion the amount of agency debt it will buy this year and raised the amount of agency-guaranteed mortgage backed securities it will purchase by $750 billion to $1.25 trillion.

The FOMC announcement also anticipated that the Term Asset-Backed Securities Loan Facility, which finances purchases of consumer and small business-related asset backed securities, will be expanded to include “other financial assets” as eligible collateral.

Bernanke said the Fed resorted to these and other measures because its conventional monetary policy easing was not proving adequate to combat the financial crisis and recession.

He said the Fed’s reduction in the federal funds rate to near zero caused shorter-term market rates to decline “significantly.” And he said this has had the effect of “offsetting, at least to some degree, the effects of the financial turmoil on the cost of credit.”

“However ... that offset has been incomplete,” he said. “Widening credit spreads, more-restrictive lending standards, and credit market dysfunction are working against the monetary easing and leading to tighter financial conditions overall.”

Hence, the use of other unconventional policy tools.

— Market News International

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