The Federal Reserve is ready to cut interest rates aggressively to spur the economy, Chairman Ben Bernanke said Thursday, acknowledging...
WASHINGTON — The Federal Reserve is ready to cut interest rates aggressively to spur the economy, Chairman Ben Bernanke said Thursday, acknowledging that economic activity appears to be slowing and “downside risks to growth have become more pronounced.”
At a luncheon in Washington, D.C., Bernanke said that the protracted housing slump, the uncertainty in credit markets and falling stock prices all posed risks to consumer spending, which drives two-thirds of U.S. economic activity.
He said housing starts and new-home sales were off 50 percent from their peaks and that 1 in 5 adjustable-rate mortgages for subprime borrowers — those with the weakest credit — were now 90 days delinquent.
“Additional policy-easing may well be necessary,” Bernanke said, a signal that the Fed’s Open Market Committee (FOMC), which sets interest rates, is likely to cut the bench mark federal-funds rate by another half-point, to 3.75 percent, when it meets on Jan. 29 and 30.
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The federal-funds rate is the rate that banks and other institutions charge one another for overnight loans, and if the Fed cuts it as expected, banks are expected to reduce their prime rates — the interest rates they charge their best customers — to 6.75 percent.
For consumers, that means that rates on car and home loans and credit-card debt could fall in coming months.
Stocks soared after Bernanke’s address, but gave back some of those gains before markets closed. The Dow Jones industrial average ended up 117 points.
“We now anticipate that the FOMC will reduce its federal-funds rate target by 50 basis points to 3.75 percent at the end of the month and likely to 3.5 percent at its March meeting,” Bank of America economist Peter Kretzmer wrote in a note to investors. “Our baseline economic outlook is for very slow growth in the first half of 2008 but no recession.”
Mainstream economists are increasing the odds of a recession — two consecutive quarters of negative economic growth — almost daily.
That’s based on new developments such as an announcement late Thursday by credit-card giant American Express that it would take a $440 million hit against earnings last year because of rising delinquencies.
Interest-rate cuts generally don’t have much impact on the economy for a year or two, so it’s doubtful that the Fed’s expected action this month could head off a recession, but it might shorten a downturn and ease its sting.