Fed chief vows 'substantive' action
In a speech to a women's financial group, Bernanke said the central bank will act quickly and decisively, though adding in response to a question that the Fed "is not currently forecasting a recession."
Still, Bernanke made it clear the central bank is concerned about "more pronounced" downside risks to the economy and "fragile" financial markets.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary," Bernanke said. "We stand ready to take substantive additional action as needed."
The Fed has already cut a key interest rate from 5.25 percent to 4.25 percent in three moves starting in September. Many economists predict the Fed will cut rates again when it next meets Jan 29-30, perhaps by a half-percentage point. The central bank faces a full-blown housing recession, deteriorating job market, declines in manufacturing and a freeze-up in credit markets.
Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Washington Research Group, called Bernanke's speech "very forceful," backing the view of a half-percentage-point cut. He also said Bernanke is signaling that he is willing to risk rising inflation later, in order to stabilize the economy today. Gramley termed that the right call.
"We are looking in my judgment at the worst financial crisis this economy has faced in the last 50 years," Gramley said.
Bernanke called the increase in unemployment in December to 5 percent from 4.7 percent in November disappointing. While he cautioned against reading too much into one month's data, he warned that a slowing job market could stymie consumer spending, more than two-thirds of U.S. economic activity.
Bernanke noted that rapidly rising energy and food costs have increased inflation risks. Oil prices recently hit $100 a barrel, and food prices last year increased "exceptionally rapidly" by recent standards, he said. But so far, consumer and business expectations for higher inflation have remained reasonably tame.
In addition to rate cuts, the Fed has auctioned funds to banks to try to ease credit concerns. Bernanke said the efforts have helped but can't eliminate financial market problems. The Fed must remain "exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability," he said.
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