Bernanke: Rate Cut Possible to Cure ‘Historic’ Slump

Reuters
Tuesday, October 7, 2008

Federal Reserve Chairman Ben Bernanke Tuesday signaled a readiness to lower interest rates in a dramatic shift to support an economy battered by a financial crisis of “historic dimension.”

Recent economic data and financial developments show that the outlook for growth has worsened and downside risks to growth have gained, Bernanke said in remarks to the National Association for Business Economics. The outlook for inflation, while still uncertain, has improved somewhat as oil and other commodity prices have eased, he said.

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

In opening the door to rate cuts, Bernanke is departing from the view he and other Fed officials had expressed until recently that lower rates would likely have little effect in boosting economic activity while credit markets are frozen.

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Bernanke said the economy is poised for subdued growth during the remainder of this year and into next year. Financial turmoil is likely to extend the weak period and increase risks to growth, he said.

“Continued efforts to stabilize the financial markets are essential,” he said. “The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity,” he added.

The chairman’s comments drew surprise from some quarters.

“Despite the huge new programs to provide liquidity to the markets, the Fed Chairman just gave the green light for a rate cut at the October meeting if not before,” said Bank of Tokyo-Mitsubishi economist Chris Rupkey. “When the risks to the economic outlook increase, this is the sign that policymakers are preparing the markets for a rate cut and not a moment too soon.”

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