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Bernanke calls for Fed rates policy re-evaluation

Latest update : 2008-10-08

The US Federal Reserve must consider whether its current interest rate policy "remains appropriate", Chairman Ben Bernanke said amid speculation about a need for rate cuts.

Click here for full coverage of the financial crisis

 

The Federal Reserve must consider whether its current interest rate policy "remains appropriate" in view of exceptional market turmoil, chairman Ben Bernanke said Tuesday amid swirling speculation about a need for rate cuts.
   
Bernanke, speaking to business economists in Washington, provided a hint that the US central bank could cut rates as part of its efforts to stem a widening financial crisis.
   
He said the turmoil in markets and latest data suggest "that the outlook for growth has worsened and that the downside risks to growth have increased."
   
"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 augment the exceptional measures undertaken to battle a credit crunch that threatens economic activity.
   
The current base Fed rate is 2.0 percent, and some analysts have said they expect a cut on or before the Fed's next policy meeting October 28-29.
   
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.
   
The problems stemming from a collapse in US real estate and the troubles of financial firms that fueled a speculative bubble have put enormous strains on the system, the Fed chief said.
   
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.
   
"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, and on Tuesday announced plans to buy commercial paper, or unsecured private loans, to help unfreeze interbank loans.
   
Bernanke expressed optimism that the range of efforts to break the credit crunch and restore stability would eventually work.
   
He said it was "fortunate" that the relief efforts are aimed at preventing the failure of many firms and not rescuing failed ones.
   
"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 out 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."
   

 

Date created : 2008-10-07

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