Maverick
January 10th, 2008, 09:35 PM
Fed Chief Signals Further Rate Cut
By LOUIS UCHITELLE and MICHAEL M. GRYNBAUM
Presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed will cut interest rates soon, perhaps by an unusually large amount.
“The outlook for real activity in 2008 has worsened,†Mr. Bernanke said after listing several forces dragging down the economy. “We stand ready to take substantive additional actions as needed to support growth and to provide adequate insurance against downside risks,†he added.
With fears rising that the economy is sliding into recession, Mr. Bernanke’s blunt assessment is expected to encourage greater calls among politicians for Washington to take steps to stimulate growth beyond what the Fed can achieve through lower interest rates.
The Fed, scheduled to next meet on Jan. 29 and 30, is now expected to cut half a percentage point off its benchmark rate to 3.75 percent. Most 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 may already have hit a wall. Shortly before Mr. Bernanke spoke, at a Washington luncheon, the nation’s biggest retailers announced that holiday sales gains were the weakest in the last five years. Only Wal-Mart stood out positively, after it slashed prices to draw strapped and jittery consumers.
“Bernanke should have made this commitment to cut rates aggressively two or three months ago,†said Mark Zandi, chief economist at Moody’s Economy.com. “Will it be enough? It will be close. With aggressive rate cuts, some fiscal stimulus and a bit of luck, maybe we’ll avoid a recession.â€
The stock market responded with uncertainty at first to Mr. Bernanke’s remarks, but then chalked up solid gains by the end of the day. The Dow Jones industrial average surged as he spoke, then fell back, then rose again, closing up nearly a percentage point to 12,735.31.
Encouraged by other developments as well, including reports that the nation’s 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.
“Maybe the Fed and the market are not quite on the same page yet,†said Richard Berner, co-head of global economics at Morgan Stanley, “but they are getting a lot closer.â€
Mr. Bernanke’s gloomy assessment of the economy marked a turning point for the Fed. Until now, most central bankers, starting with Mr. Bernanke, had spoken publicly of their “uncertainty†about what lay ahead. They have cut their benchmark, 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 policymakers’ last public statement in mid-December. Within the last week, the Labor Department reported a sharp jump in the unemployment rate, A.T.&T. said that a number of customers were not paying their bills, American Express reported weaker spending by its cardholders, and the nation’s retailers released their disappointing holiday sales figures.
Acknowledging the evidence, President Bush, speaking in Chicago on Monday, said the nation faces “economic challenges†and “we cannot take growth for granted.â€
The accumulating 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 or extended unemployment insurance or some other subsidy.
Senator Hillary Rodham Clinton, responding to the concerns about the economy, became the first presidential candidate of either party to propose a stimulus package. She will ask Congress for $70 billion in emergency aid, mainly to provide subsidies for lower income families hurt by the economic turmoil, her aides said Thursday. The Clinton package is to be announced in California on Friday.
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 gotten worse in recent weeks.
Housing starts and new home sales are off 50 percent from their peaks, he said. Foreclosures are rising and so are the number of households behind on their mortgages. In the financial markets, the subprime shock “has contributed to a considerable increase in investor uncertainty,†he reported, adding that the Fed is seeing “considerable evidence that the banks have become more restrictive in their lending to firms and households.â€
Offering an explanation for the Fed’s reluctance to act more aggressively sooner, Mr. Bernanke said that economic growth seemed “to have continued at a moderate pace†until recently, when new information increasingly indicated that “the downside risks to growth have become more pronounced.â€
The Fed, Mr. Bernanke said, had counted on an expanding job market to “support moderate growth†in consumer spending. But the government report 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.
“It would be a mistake to read too much into any one report,†Mr. Bernanke said of the jobs report, “However, should the labor market deteriorate, the risks to consumer spending would rise.â€
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.
“Thus far,†he said, “inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished.â€
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 Fed’s discount window, he said, had not worked as well as auctioning fixed multi-billion 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 level of interest rates. The auctions, he said, “may thus become a useful permanent addition to the Fed’s toolbox.â€
In his speech, Mr. Bernanke carefully avoided any discussion of a recession, which represents an extended period in which economic activity falls and unemployment rises. But some economists argue that such a downturn may be unavoidable —or already have started — despite the Fed’s recent efforts to contain the damage from the housing collapse and credit market turmoil.
“However much the Fed cuts rates between now and the spring,†said Brian Bethune, an economist at Global Insights, “the die is cast for a pretty rough six months and a very high risk of recession.â€
Asked about the possibility of a recession, Mr. Bernanke side-stepped 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.
“You really cannot make a determination,†he said with a sly grin, “until well after the event.â€
By LOUIS UCHITELLE and MICHAEL M. GRYNBAUM
Presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed will cut interest rates soon, perhaps by an unusually large amount.
“The outlook for real activity in 2008 has worsened,†Mr. Bernanke said after listing several forces dragging down the economy. “We stand ready to take substantive additional actions as needed to support growth and to provide adequate insurance against downside risks,†he added.
With fears rising that the economy is sliding into recession, Mr. Bernanke’s blunt assessment is expected to encourage greater calls among politicians for Washington to take steps to stimulate growth beyond what the Fed can achieve through lower interest rates.
The Fed, scheduled to next meet on Jan. 29 and 30, is now expected to cut half a percentage point off its benchmark rate to 3.75 percent. Most 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 may already have hit a wall. Shortly before Mr. Bernanke spoke, at a Washington luncheon, the nation’s biggest retailers announced that holiday sales gains were the weakest in the last five years. Only Wal-Mart stood out positively, after it slashed prices to draw strapped and jittery consumers.
“Bernanke should have made this commitment to cut rates aggressively two or three months ago,†said Mark Zandi, chief economist at Moody’s Economy.com. “Will it be enough? It will be close. With aggressive rate cuts, some fiscal stimulus and a bit of luck, maybe we’ll avoid a recession.â€
The stock market responded with uncertainty at first to Mr. Bernanke’s remarks, but then chalked up solid gains by the end of the day. The Dow Jones industrial average surged as he spoke, then fell back, then rose again, closing up nearly a percentage point to 12,735.31.
Encouraged by other developments as well, including reports that the nation’s 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.
“Maybe the Fed and the market are not quite on the same page yet,†said Richard Berner, co-head of global economics at Morgan Stanley, “but they are getting a lot closer.â€
Mr. Bernanke’s gloomy assessment of the economy marked a turning point for the Fed. Until now, most central bankers, starting with Mr. Bernanke, had spoken publicly of their “uncertainty†about what lay ahead. They have cut their benchmark, 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 policymakers’ last public statement in mid-December. Within the last week, the Labor Department reported a sharp jump in the unemployment rate, A.T.&T. said that a number of customers were not paying their bills, American Express reported weaker spending by its cardholders, and the nation’s retailers released their disappointing holiday sales figures.
Acknowledging the evidence, President Bush, speaking in Chicago on Monday, said the nation faces “economic challenges†and “we cannot take growth for granted.â€
The accumulating 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 or extended unemployment insurance or some other subsidy.
Senator Hillary Rodham Clinton, responding to the concerns about the economy, became the first presidential candidate of either party to propose a stimulus package. She will ask Congress for $70 billion in emergency aid, mainly to provide subsidies for lower income families hurt by the economic turmoil, her aides said Thursday. The Clinton package is to be announced in California on Friday.
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 gotten worse in recent weeks.
Housing starts and new home sales are off 50 percent from their peaks, he said. Foreclosures are rising and so are the number of households behind on their mortgages. In the financial markets, the subprime shock “has contributed to a considerable increase in investor uncertainty,†he reported, adding that the Fed is seeing “considerable evidence that the banks have become more restrictive in their lending to firms and households.â€
Offering an explanation for the Fed’s reluctance to act more aggressively sooner, Mr. Bernanke said that economic growth seemed “to have continued at a moderate pace†until recently, when new information increasingly indicated that “the downside risks to growth have become more pronounced.â€
The Fed, Mr. Bernanke said, had counted on an expanding job market to “support moderate growth†in consumer spending. But the government report 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.
“It would be a mistake to read too much into any one report,†Mr. Bernanke said of the jobs report, “However, should the labor market deteriorate, the risks to consumer spending would rise.â€
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.
“Thus far,†he said, “inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished.â€
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 Fed’s discount window, he said, had not worked as well as auctioning fixed multi-billion 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 level of interest rates. The auctions, he said, “may thus become a useful permanent addition to the Fed’s toolbox.â€
In his speech, Mr. Bernanke carefully avoided any discussion of a recession, which represents an extended period in which economic activity falls and unemployment rises. But some economists argue that such a downturn may be unavoidable —or already have started — despite the Fed’s recent efforts to contain the damage from the housing collapse and credit market turmoil.
“However much the Fed cuts rates between now and the spring,†said Brian Bethune, an economist at Global Insights, “the die is cast for a pretty rough six months and a very high risk of recession.â€
Asked about the possibility of a recession, Mr. Bernanke side-stepped 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.
“You really cannot make a determination,†he said with a sly grin, “until well after the event.â€