Speaking at the Atlanta Fed's Financial Markets Conference, Federal Reserve Chairman Ben Bernanke addressed the current state of the U.S. economy, calling current financial market conditions "far from normal."
"The provision of liquidity by a central bank can help mitigate a financial crisis. However, central banks face a tradeoff when deciding to provide extraordinary liquidity support," he said. "A central bank that is too quick to act as liquidity provider of last resort risks inducing moral hazard; 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."
Bernanke said that he will take some time to consider how to best approach the fundamental strains on financial markets and that the Fed will stop taking extraordinary measures as markets return to normalcy. He also added that the Fed stood ready to increase Term Auction Facility (TAF) auctions as warranted.
By Ryan Szporer and edited by Cristina Markham