Fed open to further cuts

WASHINGTON – Federal Reserve Chairman Ben Bernanke pledged Thursday to slash interest rates as needed to prevent housing and credit problems from plunging the country into a recession.

The Fed chief made it clear the central bank was prepared to act aggressively to rescue a weakening economy. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” he said.

Bernanke showed his hand in terms of the Fed’s likely next move amid mounting concerns that the economy may be in danger.

Many economists now believe the Fed will slice its key interest rate by a bold one-half of a percentage point when the Fed meets next Jan. 29-30. Some, however, think the Fed will go with a more modest one-quarter point reduction, given concerns that high energy prices could spark inflation.

Wall Street was buoyed by Bernanke’s words. The Dow Jones closed 117.78 points higher at 12,853.09.

“The Federal Reserve is not currently forecasting a recession,” Bernanke said, fielding questions after his speech. It is, however, “forecasting slow growth,” he said.

To bolster the economy, the Fed lowered its key rate three times last year. Its last cut, on Dec. 11, left the rate at 4.25 percent, a two-year low. Still, Bernanke has come under criticism for not acting more aggressively.

Worries about the country’s economic health have gripped voters, galvanized presidential candidates and spurred the White House and Congress to explore ways to stimulate the economy. The White House is considering a tax cut.

Hiring practically ground to a halt in December, pushing the unemployment rate to 5 percent, a two-year high, the government said in a report last week that rattled Wall Street and Main Street.

Bernanke, in a speech to a housing and economic forum in Washington, cautioned against reading too much into one report. But he said that if employment conditions continue to deteriorate, that would raise risks to the economy. The big worry is consumers might cut spending, sending the economy into a tailspin.

Incoming information suggests the outlook for economic activity this year has worsened and the “downside risks to growth have become more pronounced,” said Bernanke.

A housing slump, weaker home values, harder-to-get credit and high energy prices all “seem likely to weigh on consumer spending as we move into 2008,” Bernanke said.

Many analysts predict upcoming reports will show the economy grew at 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year as consumers – major shapers of overall economic activity – tighten their belts. On Thursday, major retailers reported weak sales for December.

In light of such risks to the economy’s growth, “additional policy easing may well be necessary,” said Bernanke.

Some economists said the odds of a recession are up to 50 percent.

The housing slump – aggravated by harder-to-get credit – has weighed heavily on national economic activity. Foreclosures have soared to record highs and financial companies have wracked up multibillion losses because of bad mortgage investments. The problems, which are expected to persist this year, have unnerved Wall Street.

The situation raises the biggest challenge yet to Bernanke, who took over the Fed in February 2006.

“Bernanke was very clear: He rang a siren call. The economy is ailing and it needs stronger medicine – a good shot of adrenaline,” said Brian Bethune, economist at Global Insight. Bethune predicts a half-point cut on Jan. 30, followed by other reductions that would lower the Fed’s key rate to 3.25 percent by the late spring.

“It’s hard to imagine after hearing such strong comments from Bernanke that the Fed will not cut by half a percentage point,” said Richard Yamarone, economist at Argus Research. “Anything less would roil the financial markets.”

Asked about a stimulus package being explored by the White House, Bernanke did not offer details. He did say he is interested in seeing “what emerges” and what options might be on the table.

Galloping energy prices – oil recently surged past $100 a barrel before easing – can put a damper on economic growth and can also spread inflation through the economy if they force companies to boost the prices of many goods and services.

Bernanke acknowledged the situation could complicate the Fed’s job of trying to keep the economy growing, while making sure that inflation is under control.

Will the upcoming presidential elections color the Fed’s decisions on interest rates? Bernanke offered a flat no. “Political considerations will play no role. We will be objective. We will be analytical, and we will do what is right for the economy.”