Fed. Chairman Bernanke Says More Cuts Are Coming
Wednesday, February 27, 2008SUSIE GHARIB: Ben Bernanke hinted today that more interest rate cuts are on the way. Testifying before Congress, the Federal Reserve chairman acknowledged that the economy is still struggling and suggested policymakers are on track to reduce rates again next month. Bernanke also raised concerns about inflation, but made it clear the Fed needs to boost economic growth for now. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The labor market is soft. Credit markets are stressed. Consumer spending is slow. Some of the items on the gloomy list of economic challenges Federal Reserve Chairman Ben Bernanke cited in his congressional testimony today.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: The risks to this outlook remain to the downside. Those risks include the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.
GERSH: While weak growth is clearly the Fed's top concern, Bernanke is also confronting inflation fears sparked by $100-a-barrel oil. If consumers expect prices will keep rising Bernanke warned, that would undermine confidence in the Fed, making it harder to keep interest rates low. For now, Federal Reserve policy makers are expecting slower economic growth to ease inflation pressures. But Bernanke acknowledged last year's 4.3 percent jump in consumer prices was not good news.
BERNANKE: We're trying to estimate what's going to happen this year. A lot of it depends on what happens to the price of oil. If oil flattens out, we'll do better, but if it continues to rise at the rate of 2007, it will be hard to maintain low inflation.
GERSH: Continuing turmoil in credit markets is also complicating the Fed's efforts to help borrowers. Worried lenders are now demanding higher interest rates, a fear that can be measured in the difference between interest rates on super-safe Treasuries and mortgages. Wall Street calls that difference the spread and it has jumped from just under 1.5 percentage points last year to well over 2 this year. Bernanke said those wider spreads mean Federal Reserve rate cuts aren't helping many consumers.
BERNANKE: Our policy is essentially in some cases just offsetting the widening of the spreads, which are associated with various kinds of illiquidity or credit issues. So, in that particular area, it's been more difficult to lower long-term mortgage rates.
GERSH: Vincent Reinhardt is a former senior Fed economist. He says the Federal Reserve will have to lower its key short-term interest rate more aggressively than policy makers originally thought.
VINCENT REINHARDT, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: To the extent that spreads widen, that means that you have to lower your policy rate more to get the same outcome for private rates and we think it's private rates that matter for activity.
GERSH: Many economists and traders now expect the Federal Reserve to cut interest rates another half a percent point at its March 18th meeting. Ben Bernanke had a chance to change that thinking today, but he clearly chose to deliver a message that would not disappoint the markets. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
