Desperate Fed Talks of ‘Decisive’ Action


Richard Moore

In a speech in Washington, Bernanke said fed policymakers "must remain 
exceptionally alert and flexible, prepared to act in a decisive and timely 
manner and, in particular, to counter any adverse dynamics that might threaten 
economic or financial stability."

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Fed Chief Talks of 'Decisive' Action
Addressing Slump, Bernanke Signals Another Rate Cut
By Neil Irwin
Washington Post Staff Writer
Friday, January 11, 2008; A01

Federal Reserve Chairman Ben S. Bernanke yesterday signaled that the central 
bank will cut interest rates aggressively to try to prevent a serious economic 
downturn, using unusually direct and forceful language.

In the past two weeks, new evidence has emerged that the United States is at 
risk of entering a recession. Just yesterday the nation's largest retail chains 
reported weak December sales, and credit card companies American Express and 
Capital One said they are seeing more unpaid bills.

In a speech in Washington, Bernanke said fed policymakers "must remain 
exceptionally alert and flexible, prepared to act in a decisive and timely 
manner and, in particular, to counter any adverse dynamics that might threaten 
economic or financial stability."

Bernanke, in his first public comments of 2008, said that "additional policy 
easing may well be necessary."

That probably means the central bank will cut the short-term interest rate it 
controls by half a percentage point at its meeting at the end of the month, 
economists said. Such a move would stimulate the economy by making it cheaper 
for consumers and businesses to borrow money. At both of its previous two 
meetings, the Fed's policymaking committee cut the federal funds rate by a 
quarter percentage point. It is now 4.25 percent.

There is a 92 percent chance the Fed will cut that rate by half a percentage 
point, based on futures market pricing yesterday. That figure was 76 percent 
before Bernanke's speech.

"The backdrop here is the Fed is worried that the economy could be sliding into 
a recession," said Bruce C. Kasman, chief economist at J.P. Morgan Chase. He 
said the central bank is likely to cut rates at each of its next two meetings 
and "decided it was desirable and important to signal that to the market 

At its two most recent meetings, the Fed's policymaking committee has indicated 
it considers inflation to be a major worry. Oil and other energy prices have 
been rising, and a weaker dollar could make imports more expensive. Rate cuts 
tend to result in a weaker dollar, a potential source of inflation.

But yesterday, Bernanke played down those worries, noting that higher 
unemployment tends to reduce inflationary pressure. "Thus far, inflation 
expectations appear to have remained reasonably well anchored, and pressures on 
resource utilization have diminished a bit," he said to Women in Housing and 
Finance and the Exchequer Club.

"It looks like the focus of the Federal Reserve has moved away from inflation 
and toward growth," said Drew Matus, a senior economist at Lehman Brothers.

After the speech, Bernanke was asked whether he expects, as the questioner put 
it, "the r-word."

"The Federal Reserve is not currently forecasting a recession," Bernanke said. 
"We are forecasting slow growth. But as I mentioned today, there are downside 
risks and therefore it's very important for us to stand ready . . . to take 
substantive action to address those risks and provide some insurance against 
those negative outcomes."

The risks the economy faces were underscored yesterday by reports that suggest 
American consumers are pulling back. Major U.S. retail chains' sales grew 2.2 
percent this holiday season, according to an industry group, less than the rate 
of inflation and representing the weakest holiday season since 2002.

American Express took a $440 million charge because more holders of its credit 
cards failed to pay their debts. Its chief executive said that the poor credit 
trends were most pronounced in California, Florida, and other states with big 
losses from the housing downturn. Capital One of McLean warned investors that 
its profit for 2007 would be sharply lower than forecast for the same reason.

As Bernanke indicated that he is willing to use monetary policy to combat the 
risk of a serious downturn, momentum continued to gather for using the 
government's other major economic policy tool -- fiscal stimulus -- to combat 
the slump in the economy.

President Bush has said he may propose government action to stimulate the 
economy -- probably a tax cut. Congressional Democrats are formulating stimulus 
measures of their own. Yesterday, former Treasury secretary Robert Rubin, former
Fed vice chairman Alice Rivlin and other leading economic thinkers joined the 
chorus advocating such a move.

"You can care very deeply about the structural fiscal condition and still 
believe that properly structured stimulus makes sense," said Rubin, who was 
leading a Brookings Institution panel on how a stimulus should be designed.

Brookings scholars Douglas W. Elmendorf and Jason Furman recommended that a 
stimulus plan be implemented quickly if it is to have any hope of averting an 
economic downturn, that it be targeted to put money in the pockets of people who
are most likely to spend it and that it be a one-time shot so as not to increase
long-term deficits.

Panelists, including Republican economist Martin Feldstein, generally agreed on 
that approach, though they did not express great confidence that legislation 
could make it through Congress and the White House with those goals intact.

Bernanke told his audience that his views on a stimulus package were "inchoate" 
when asked about it. He said he is interested in discussing specific plans with 
the administration and congressional leaders as they develop them.

The speech was a homecoming of sorts for Bernanke; it was delivered in the 
Mayflower Hotel, where, in 1965, Bernanke was eliminated from the National 
Spelling Bee for misspelling "edelweiss."

© 2008 The Washington Post Company

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