[R-G] Bernanke Says Fed Ready for Aggressive Cut

[Yoshie Furuhashi]

<http://www.ft.com/cms/s/0/7e8cc27a-bfa6-11dc-8052-0000779fd2ac.html?nclick_check=1>
Bernanke says Fed ready for aggressive cut

By Krishna Guha in Washington

Published: January 10 2008 18:09 | Last updated: January 10 2008 18:09

In a dramatic change of tone, Ben Bernanke on Thursday indicated that
the Federal Reserve is ready to cut interest rates aggressively to
ward off the risk of a US recession, sending stocks soaring.

The Fed chairman said "we stand ready to take substantive additional
action as needed to support growth and to provide additional insurance
against downside risks".

This decisive language represents a new message from the Fed, which as
late as its December policy meeting emphasised the uncertainty
surrounding the economic outlook, with risks to both growth and
inflation.

Mr Bernanke said the economy probably grew at a "moderate pace" in the
final quarter of 2007.

But he said "incoming information has suggested that the baseline
outlook for real activity in 2008 has worsened and the downside risks
to growth have become more pronounced".

In the light of "recent changes to the outlook for and the risks to
growth, additional policy easing may well be necessary", Mr Bernanke
said.

Demand for housing "seems to have weakened further, in part reflecting
the ongoing problems in mortgage markets".

In addition, he said, higher oil prices, lower equity prices and
softening home values were likely to "weigh on consumer spending as we
move into 2008".

He warned that the strains in financial markets "continue to pose a
downside risk to the outlook for growth" with investors still
uncertain about the true value of complex financial assets and about
the extent of additional losses that may be disclosed in the future.

The financial situation "remains fragile and many funding markets
remain impaired" he said.

The Fed chief said there was already "considerable evidence that banks
have become more restrictive in their lending to firms and
households".

This he said was "likely to impose a measure of financial restraint on growth".

Mr Bernanke also raised the risk of a negative feedback loop taking
hold – with the credit squeeze causing broad economic weakness that
raises the risk of further losses in the financial system, that could
in turn intensify the credit squeeze.

"Adverse economic or financial news has the potential to increase
financial strains and to lead to further constraints on the supply of
credit to households and businesses" he said.

Mr Bernanke said the labour market represented a "second consequential
risk to growth". He said that prior to December's "disappointing" jobs
report, the labour market had been a "source of stability".

"Should the labour market deteriorate, the risks to consumer spending
would rise," he said.

The Fed chairman did not discard the US central bank's inflation
concerns, warning that the renewed strength in oil prices was "lifting
overall consumer prices and probably putting some upward pressure on
core inflation measures as well".

He hinted that provided inflation expectations remained steady this
would not get in the way of Fed easing, but said "we will be closely
monitoring the inflation situation, in particular as regards inflation
expectations".

Mr Bernanke's comments came as Robert Rubin, the former US Treasury
Secretary, threw his weight behind plans for a fiscal stimulus to
provide further support for the US economy, which a panel of experts
he chaired suggested should be about $100bn.

--
Yoshie
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