Feds ready to slash rates again
WASHINGTON (AP) - January 10, 2008 The Fed chief made clear the central bank was prepared to act
aggressively to rescue a weakening economy. "We stand ready to
take substantive additional action as needed to support growth and
to provide adequate insurance against downside risks," he said.
Bernanke showed his hand in terms of the Fed's next move amid
mounting concerns that the economy may be in danger.
Some economists believe the Fed will slice its key interest rate
by a bold half percentage point when the Fed meets next on Jan. 29
and 30. Others, however, think the Fed will go with a more modest
one-quarter percentage point reduction, given concerns that high
energy prices could spark inflation.
To bolster the economy, the Fed lowered its key rate three times
last year. Its last cut, on Dec. 11, left the rate at 4.25 percent,
a two-year low. Still, Bernanke has come under criticism for not
acting more aggressively to deal with the economy's problems.
Worries about the country's economic health have gripped voters,
galvanized presidential candidates and spurred the White House and
Congress to explore ways to stimulate the economy to avoid a
recession. The White House is considering a tax cut.
Hiring practically ground to a halt in December, pushing the
unemployment rate up to 5 percent, a two-year high, the government
said in a report last week that rattled Wall Street and Main
Street.
Bernanke, in a speech to a housing and economic forum here,
cautioned against reading too much into one report. However, he
said that if employment conditions were to continue to deteriorate,
that would raise risks to the economy. The big worry is that
consumers might cut back on their spending, sending the economy
into a tailspin.
Incoming information suggests that the outlook for economic
activity for this year has worsened and that the "downside risks
to growth have become more pronounced," Bernanke warned.
A housing slump, weaker home values, harder-to-get credit and
high energy prices all "seem likely to weigh on consumer spending
as we move into 2008," Bernanke said.
Many analysts predict upcoming reports will show the economy
grew at a feeble pace of just 1.5 percent or less in the final
three months of last year and will be weak in the first three
months of this year as consumers - major shapers of overall
economic activity - tighten their belts.
In light of such risks to the economy's growth, "additional
policy easing may well be necessary," said Bernanke.
Former Federal Reserve Chairman Alan Greenspan, who ran the Fed
for 18 1/2 years, recently warned that the economy is "getting
close to stall speed." Some economists said the odds of a
recession are up to 50 percent.
The housing slump - aggravated by harder-to-get credit - has
weighed heavily on national economic activity. Foreclosures have
soared to record highs and financial companies have wracked up
multibillion losses because of bad mortgage investments. The
problems, which are expected to persist well into next year, have
unnerved Wall Street. Financial markets remain fragile, Bernanke
said.
The situation raises the biggest challenge yet to Bernanke, who
took over the Fed in February 2006.
Galloping energy prices - oil recently surged past $100 a barrel
before easing - can put a damper on economic growth and can also
spread inflation through the economy if they force companies to
boost the prices of many goods and services.
Bernanke acknowledged the situation could complicate the Fed's
job of trying to keep the economy growing, while making sure that
inflation is under control.
So far, he said, people and companies have "reasonably
well-anchored" expectations about where they think inflation will
head in the months ahead, Bernanke said. "However, any tendency of
inflation expectations to become unmoored or for the Fed's
inflation-fighting credibility to be eroded could greatly
complicate" the Fed's task of maintaining stable prices, he said.
To help squeezed banks deal with credit problems, the Fed
recently created a new auction facility for financial institutions
to go to for short-term loans. The Fed in December provided $40
billion worth of loans to banks and will provide another $60
billion in two auctions in January.
Bernanke said these auctions will continue "as long as
necessary" to help banks get over credit humps so that they will
keep lending to people and companies. The auctions, Bernanke said,
"may thus become a useful permanent addition to the Fed's
toolbox."