Bernanke Signals Fed Is Prepared to Cut Rates as Crisis Deepens

Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze worsens the outlook for U.S. economic growth and as inflation concerns wane.

The remarks suggest Bernanke is ready to cut the benchmark lending rate from 2 percent, possibly before the Oct. 28-29 meeting. The Fed is pumping more than $1 trillion of short-term cash loans into the banking system to head off a global liquidity squeeze against banks and borrowers. Earlier today Bernanke moved to backstop the short-term corporate debt market.

The Federal Open Market Committee has left its target for the main interest unchanged at the last three meetings after cutting the rate by 3.25 percentage points from September to April.

The Fed said today it would start buying three-month commercial paper after the credit freeze threatened to cut off the key source of funding for corporations. The action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis.

The Treasury Department is making a deposit with the Fed's special purpose vehicle that is substantial, Fed staff officials said today. The funds won't come from the $700 billion rescue plan authorized by Congress last week, under which the Treasury will purchase distressed debt such as mortgage-backed securities. The Treasury program should, ``with time,'' help make credit flow and revive economic growth, Bernanke said today.

The Fed chief scaled back his prediction on Sept. 24 that the U.S. economy would expand in the second half at a slow pace, saying instead today that ``economic activity is likely to be subdued during the remainder of this year and into next year.''

Bernanke's dropped his assessment that risks of higher inflation were a ``significant concern,'' while repeating that the outlook for prices is still ``highly uncertain'' because of volatile costs for oil and other commodities.

Today's comments followed reports last week showing that employers cut the most jobs in five years in September. Also, manufacturing shrank at the fastest pace since 2001, reinforcing concern the U.S. is already in a recession.

Bernanke has pushed the limits of the Fed's powers to create an array of unprecedented lending programs as the credit crisis spread from banks to securities firms, mutual funds, the biggest U.S. insurer and now corporate America.

Over the past week the Fed announced plans to pump an additional $1 trillion into the global financial system through auctions of cash loans to banks. That's on top of the central bank's $147 billion in loans to Wall Street bond dealers and $152 billion in lending to backstop money market mutual funds as of Oct. 1.

Bernanke Signals Fed Is Prepared to Cut Rates as Crisis Deepens
10/7/2008 11:00:47 AM