Bernanke not afraid to trim interest rates

Thursday, February 28th, 2008

Rising inflation among risks to further growth


WASHINGTON — U.S. Federal Reserve chairman Ben Bernanke yesterday signaled a readiness to cut interest rates again to prevent further damage to the weak U.S. economy, even as he took note of rising inflation risks.

Delivering the Fed’s semiannual report on the economy to Congress, Bernanke made clear the central bank was worried a deepening housing slump, softening jobs market and tighter credit could dim an already bleak economic outlook.

“It is important to recognize that downside risks to growth remain,” Bernanke told the House of Representatives’ Financial Services Committee.

“The [Fed] will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” he said.

The central bank has lowered overnight interest rates to three per cent from 5.25 per cent in five steps since mid-September.

Financial markets saw Bernanke’s testimony as validating bets on another half-percentage point cut at the Fed’s next meeting on March 18.

“They’re willing to inject more juice into the system, and that’s what they need to do,” said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.

A majority of dealers expect rates to be cut to 2.5 per cent at the Fed’s next meeting. Meanwhile, the median forecast was for rates to fall as low as two per cent during this cycle.

The U.S. dollar hit a record low against the euro on Bernanke’s remarks, while bond prices bounced around in reaction to zig-zagging stocks.

Stocks traded in and out of negative territory, rallying at one point when a U.S. regulator gave the green light to home finance companies Fannie Mae and Freddie Mac to invest more in the mortgage market, but ending the day little changed.

© The Vancouver Province 2008

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