NEW YORK (AP) — The beleaguered credit markets showed fresh strain Friday after Federal Reserve Chairman Ben Bernanke left open the possibility of another interest rate cut to steady volatile financial markets.
The Fed chief said in remarks before a central banking conference in Frankfurt, Germany, that the slumping economy remains under pressure. Bernanke said he will "stand ready to take additional steps should conditions warrant."
The downbeat economic news, such as Friday's disappointing retail sales report, has only added to the market's fears about the financial system. Credit is still not flowing normally in the U.S. and overseas, and there were fresh signs that banks have grown a little more unwilling to lend each other money.
Bank-to-bank lending has begun to tighten in the past few days, with a key interbank lending rate moving sharply higher. This is a closely watched indicator of banks' willingness to make loans to one another, and determines some consumer loan rates, including those on adjustable-rate mortgages.
The London interbank offered rate, or Libor, for three-month dollar loans rose to 2.24 percent from 2.15 percent on Thursday. The rate — which peaked at 4.82 percent at the height of the financial crisis — moved higher for the first time in 23 days during Thursday's session.
Investors also were anxious after the Treasury announced Wednesday it doesn't plan to use the $700 billion bailout plan to buy banks' failed mortgage assets. Instead, the government believes buying stakes in U.S. banks will add stability to the market, allowing financial companies to make more loans.
This helped increase demand for government bonds, especially as the stock market zigzaged throughout the session before closing sharply lower; the Dow Jones industrials lost nearly 340 points. Buying into Treasurys is considered to be a safe bet during market volatility.
Investors remain nervous that a drop in consumer spending will extend an already serious economic downturn. That was highlighted in a Commerce Department report that showed retail sales plunged by the largest amount on record in October; there were also disappointing reports from a number of top retailers, including Abercrombie & Fitch Co. and JCPenney Co.
"Consumers have put away their wallets and went on a buying strike," said Sung Won Sohn, an economist at the Smith School of Business at California State University. "The financial market turmoil, tightening credit, job losses and the recession fears are keeping them away from shopping centers."
In late trading, the 2-year Treasury note rose 1/32 to 100 18/32 and yielded 1.21 percent, down from 1.23 percent Thursday. The 10-year note rose 1 1/32 to 100 7/32 and yielded 3.72 percent, down from 3.85 percent. The 30-year bond rose 2 13/32 to 104 24/32 and yielded 4.22 percent, down from 4.36 percent.
Demand for short-term Treasurys also rose. The yield on the three-month Treasury bill — considered one of the safest assets around — fell to 0.14 percent from 0.20 percent Thursday. The discount was 0.12 percent.
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