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Bernanke hints at Fed rate cut
Posted: 08 October 2008 0127 hrs

 
 
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WASHINGTON: Federal Reserve chairman Ben Bernanke hinted on Tuesday that the central bank would cut interest rates as the outlook for economic growth in the United States worsens.

Speaking to business economists in Washington, Bernanke explained how the latest economic data showed the prospects for the world's biggest economy had grown gloomier amid a credit crunch and broad financial crisis.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he said.

Bernanke's comments came amid growing calls for rate cuts by the Fed, possibly coordinated with other central banks, to help bolster the exceptional measures already taken to contain the worst banking crisis since the 1930s.

The current base Fed rate is 2.0 percent, voted unanimously by the Fed's members in September. Some analysts have said they expect a cut on or before the Fed's next policy meeting on October 28-29.

"In view of the intensifying international dimension to the crisis, it would not be a surprise if a coordinated rate move (cut) were announced at G7 meetings on Friday in Washington," predicted an analyst at Bank of America, Peter Kretzmer.

Finance chiefs of the Group of Seven industrialised countries - Britain, Canada, France, Germany, Italy, Japan and the United States - were expected to discuss the financial crisis at their meeting on Friday

"We continue to look for a 50-basis-point ease from the Fed," Kretzmer added.

Minutes from the last Fed meeting in September, published on Tuesday, showed that some policymakers had expressed support for a rate cut in the event of weaker growth.

"Some members emphasised that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be necessary," the minutes said.

Bernanke noted that financial systems in the US and much of the rest of world are "under extraordinary stress," but expressed confidence that the steps being taken would eventually ease the crisis.

He added that the "severe financial instability, together with associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked."

But Bernanke said the Fed, the Treasury and other agencies were "committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical functions."

He said that authorities have taken exceptional steps, including a wide range of Fed lending to troubled financial firms and a new law providing up to 700 billion dollars to buy up distressed assets from the housing collapse.

Also on Tuesday, the Fed announced it had created a fund to buy up short-term bonds issued by companies in a bid to ensure credit continues to flow to the corporate sector.

"These are momentous steps, but they are being taken to address a problem of historic dimension," Bernanke said.

Bernanke said US economic activity would be "subdued" into next year and that the market turmoil "may well lengthen the period of weak economic performance."

At the same time, he added that the inflation picture "has improved somewhat, though it remains uncertain."

The comments come as the Fed and authorities around the world struggle in the face of a massive credit crunch that threatens to lead to a deep recession in the United States or perhaps worldwide, according to some analysts.

The exceptional steps taken included the boosting of government guarantees for bank deposits and an extension of insurance for money market funds in an effort to prevent a run on deposits.

The Fed has also started paying interest on bank reserves in an effort to keep rates steady.

Bernanke expressed optimism that the range of efforts to break the credit crunch and restore stability would eventually work.

"The Congress and the administration chose to act at a moment of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy," Bernanke said.

"The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions ... together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery." - AFP/de

 

 



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