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Home » News » Budget

Tuesday, October 7, 2008

Fed's Bernanke hints at lower interest rates

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  • Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Sept. 24, 2008, before the Joint Economic Committee. The government's biggest economic bailout since the Great Depression is aimed not at relieving unemployment or reforming questionable business practices, but at resuscitating financial markets debilitated by lousy bets on the housing market. (AP Photo/Charles Dharapak)

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By Patrice Hill

UPDATED:

WASHINGTON — Federal Reserve chairman Ben S. Bernanke suggested that the Fed will cut interest rates further in the days ahead as a result of the heightened risks to the economy from the severe financial crisis of the last month.

In a speech before the National Association of Business Economists, Mr. Bernanke said consumers and businesses have started to spend less as a result of spreading worries about the economy and reduced access to credit. Even people with good credit are having trouble obtaining mortgages and home equity loans, he said.

At the same time, the huge drop in oil prices from a record high over $147 in July to under $90 today has dramatically lowered the outlook for inflation, giving the Fed room to consider lowering rates, he said.

"The intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead," he said. "Banks are reducing credit card limits, and denial rates on automobile loan applications reportedly are rising.

"Businesses, too, are confronting diminished access to credit. For example, disruptions in the commercial paper market and tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses such as payrolls and inventories," he said.

The problems businesses are having raising cash through short-term debt sales prompted the Fed this morning to take the first-ever step of directly purchasing such unsecured debt from businesses and financial companies in the commercial paper market. Mr. Bernanke told the business economists that the move was necessary because the Fed's other direct lending programs for banks and Wall Street firms weren't working to calm that critical market.

The Fed's moves initially calmed stressed stock markets this morning, but stocks deteriorated rapidly during Mr. Bernanke's speech as investors were disappointed the Fed didn't indicate any rush to cut interest rates. The Dow Jones Industrial Average was down about 100 points at the beginning of the speech but quickly fell to a loss of 345 points as of 2 p.m.

Many analysts on Wall Street are calling for immediate, coordinated rate cuts from the Fed and its European counterpart.

Many believe the country is on the brink of, or already in, its first recession since 2001.

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