Washington–U.S. Federal Reserve Board chair Ben Bernanke sent a strong signal yesterday that the central bank will lower interest rates again this month as it attempts to stave off a recession.
Bernanke said the downturn in the credit and housing markets posed substantial risks to economic health and predicted that consumer spending and overall growth would slow in 2008.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke said in a speech in Washington.
Calling monetary policy the "Fed's best tool" for regulating the economy, Bernanke said that "additional policy easing may well be necessary" to maintain growth levels as consumer spending and home values face a steep decline next year.
His remarks lifted the expectations of investors that Fed officials will lower the overnight lending rate by as much as half a point at their next policy meeting on Jan. 29 and 30. Stock markets rallied after the remarks were released, erasing morning losses but quickly falling back. The Standard & Poor's 500-stock index closed up 11.2 points, or 0.79 per cent, to 1,420.33 and the Dow Jones industrials showed an increase of 117.78 points to 12,853.09.
Investors typically cheer rate cuts, which grease the wheels of the economy by making it easier for banks and businesses to lend to consumers and one another. But Bernanke's starkly negative forecast for 2008 may have trumped investors' short-term hopes by raising the spectre of a long-term slowdown in spending.
Some analysts have expressed concern that rising core inflation would hinder the Fed's ability to lower rates, even amid the current financial turmoil. In his remarks, Bernanke acknowledged that the Fed was closely monitoring inflation levels and that a flare-up in prices would reduce its ability to stimulate growth through monetary policy.
But he appeared more focused on the coming risks to overall growth, and he said that the Fed would be "prepared to act in a decisive and timely manner" to maintain economic stability.
He cited high oil prices, plummeting home prices and the struggling stock market as factors that "seem likely to weigh on consumer spending as we move into 2008."
A lacklustre employment report in December, which showed the unemployment rate rising by 0.3 of a percentage point, also appeared to give the chair pause. He called the report disappointing and noted that the labour market had previously been a source of stability amid a difficult economic situation.
"It would be a mistake to read too much into any one report," Bernanke said. "However, should the labour market deteriorate, the risks to consumer spending would rise."
The Fed has tried to counter the credit crunch by starting a system of anonymous auctions, which allow banks to borrow money from the government without the stigma of appearing desperate for credit. Bernanke said the new program, known as the Term Auction Facility, has been successful and "may thus become a useful permanent addition to the Fed's toolbox," pending a public vetting.
Posts
