Fearful Fed to lower interest rates


Richard Moore

"The mounting evidence has suggested to a growing number of economists and 
politicians that the Fed by itself cannot stem the economic slide and that 
Congress must help with fiscal policy in the form of a tax rebate for low-income
families, extended unemployment insurance or some other subsidy."

Original source URL:

January 11, 2008

Fed Chief Signals Further Rate Cut

Presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke,
chairman of the Federal Reserve, strongly suggested on Thursday that the Fed 
would cut interest rates soon, perhaps by a large amount.

³The outlook for real activity in 2008 has worsened,² Mr. Bernanke said after 
describing all the forces dragging down the economy. ³We stand ready to take 
substantive additional actions as needed to support growth and to provide 
adequate insurance against downside risks.²

With fears rising that the economy is sliding into recession, Mr. Bernanke¹s 
blunt assessment is expected to encourage politicians to call on Congress to 
take steps that would stimulate growth beyond what the Fed can achieve through 
lower interest rates.

Many analysts now expect the Fed¹s policy makers to cut half a percentage point 
off the Fed¹s benchmark interest rate, reducing it to 3.75 when they next meet, 
on Jan. 29 and 30. They expect the Fed to continue cutting, to 3 percent or even
lower by summer, to prevent ‹ or at least mitigate ‹ a recession. The goal would
be to get people to borrow and spend more.

Consumer spending, however, may already have hit a wall. Shortly before Mr. 
Bernanke spoke, at a Washington luncheon, the nation¹s biggest retailers 
announced that holiday sales gains were the weakest in the last five years. Only
Wal-Mart gained ground, after it slashed prices to draw jittery consumers.

³Bernanke should have made this commitment to cut rates aggressively two or 
three months ago,² said Mark Zandi, chief economist at Moody¹s Economy.com. 
³Will it be enough? It will be close. With aggressive rate cuts, some fiscal 
stimulus and a bit of luck, maybe we¹ll avoid a recession.²

The stock market responded with uncertainty at first to Mr. Bernanke¹s remarks, 
but then chalked up solid gains. The Dow Jones industrial average surged as he 
spoke, then fell back, then rose again, closing up nearly 1 percent, to 

Encouraged by other developments as well, including reports that the nation¹s 
largest mortgage lender was about to be acquired by Bank of America, traders 
apparently concluded that the Fed was at last committed to a more vigorous 
effort to lift the economy, and to reverse the recent slide in stock prices, 
which often go up in response to rate cuts.

³Maybe the Fed and the market are not quite on the same page yet,² said Richard 
Berner, co-head of global economics at Morgan Stanley, ³but they are getting a 
lot closer.²

Mr. Bernanke¹s gloomy assessment of the economy represented a turning point for 
the Fed. Until now, most of the Fed¹s top policy makers, starting with Mr. 
Bernanke, had spoken publicly of their ³uncertainty² about what lay ahead. They 
have cut their benchmark interest rate, the federal funds rate, by a full 
percentage point since mid-September in response to the credit crisis and the 
housing downturn.

But they accompanied each cut with a statement that stopped well short of 
declaring that the economy was clearly in trouble.

Evidence of deterioration has accumulated, however, since the policy makers¹ 
last public statement in mid-December. Within the last week, the Labor 
Department has reported a sharp jump in the unemployment rate; AT&T said that a 
number of customers were not paying their bills; American Express reported 
weaker spending by its cardholders; and the nation¹s retailers released their 
disappointing holiday sales figures.

Acknowledging the evidence, President Bush, speaking in Chicago on Monday, said 
the nation faces ³economic challenges² and ³we cannot take growth for granted.²

The mounting evidence has suggested to a growing number of economists and 
politicians that the Fed by itself cannot stem the economic slide and that 
Congress must help with fiscal policy in the form of a tax rebate for low-income
families, extended unemployment insurance or some other subsidy.

Without addressing the growing demands for fiscal stimulus, Mr. Bernanke devoted
most of his talk, at a forum sponsored by Women in Housing and Finance and the 
Exchequer Club, to a review of the economic damage, which he said had increased 
in recent weeks.

Housing starts and new-home sales are off 50 percent from their peaks, he said. 
Foreclosures are rising, and so is the number of households behind on their 
mortgages. In the financial markets, the subprime shock ³has contributed to a 
considerable increase in investor uncertainty,² he reported, adding that the Fed
is seeing ³considerable evidence that the banks have become more restrictive in 
their lending to firms and households.²

Offering an explanation for the Fed¹s reluctance to act more aggressively 
sooner, Mr. Bernanke said that economic growth seemed ³to have continued at a 
moderate pace² until recently, when new information increasingly indicated that 
³the downside risks to growth have become more pronounced.²

The Fed, Mr. Bernanke said, had counted on an expanding job market to ³support 
moderate growth² in consumer spending. But the government reported Friday that 
hiring had fallen almost to zero in December and the unemployment rate had 
jumped to 5 percent from 4.7 percent ‹ a rare one-month surge that almost always
indicates coming hard times.

³It would be a mistake to read too much into any one report,² Mr. Bernanke said 
of the jobs report. ³However, should the labor market deteriorate, the risks to 
consumer spending would rise.²

In a 13-page speech, the Fed chairman devoted only one paragraph to the risk of 
inflation, although some of his colleagues at the central bank have cited 
inflationary pressures as a reason to go easy on rate cuts. Mr. Bernanke 
acknowledged these concerns but clearly put them on the back burner.

³Thus far,² he said, ³inflation expectations appear to have remained reasonably 
well anchored, and pressures on resource utilization have diminished.²

Mr. Bernanke said the Fed had successfully pumped money to banks and other 
lenders damaged in the mortgage crisis. Lending to banks directly from the Fed¹s
discount window, he said, had not worked as well as auctioning fixed 
multibillion-dollar sums.

Among other advantages, he explained, the auctions gave the Fed greater control 
over how much money was entering the financial system and the effect on interest
rates. The auctions, he said, ³may thus become a useful permanent addition to 
the Fed¹s toolbox.²

In his speech, Mr. Bernanke carefully avoided any discussion of a recession, 
which would be an extended period of contracting economic activity and falling 
employment. But some economists argue that such a downturn may be unavoidable ‹ 
or already have started ‹ despite the Fed¹s recent efforts to contain the damage
from the housing collapse and credit market turmoil.

³However much the Fed cuts rates between now and the spring,² said Brian 
Bethune, an economist at Global Insights, ³the die is cast for a pretty rough 
six months and a very high risk of recession.²

Asked about the possibility of a recession, Mr. Bernanke sidestepped the 
question. As a Princeton University economist before he came to Washington, he 
said, he had served on a committee charged with setting the official starting 
and ending dates of each recession.

³You really cannot make a determination,² he said with a sly grin, ³until well 
after the event.²

Copyright 2008 The New York Times Company

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