Fed Chief Talks of 'Decisive' Action

By Neil Irwin
Washington Post Staff Writer
Friday, January 11, 2008

Federal Reserve Chairman Ben S. Bernanke yesterday signaled that the central bank will cut interest rates aggressively to try to prevent a serious economic downturn, using unusually direct and forceful language.

In the past two weeks, new evidence has emerged that the United States is at risk of entering a recession. Just yesterday the nation's largest retail chains reported weak December sales, and credit card companies American Express and Capital One said they are seeing more unpaid bills.

In a speech in Washington, Bernanke said fed policymakers "must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

Bernanke, in his first public comments of 2008, said that "additional policy easing may well be necessary."

That probably means the central bank will cut the short-term interest rate it controls by half a percentage point at its meeting at the end of the month, economists said. Such a move would stimulate the economy by making it cheaper for consumers and businesses to borrow money. At both of its previous two meetings, the Fed's policymaking committee cut the federal funds rate by a quarter percentage point. It is now 4.25 percent.

There is a 92 percent chance the Fed will cut that rate by half a percentage point, based on futures market pricing yesterday. That figure was 76 percent before Bernanke's speech.

"The backdrop here is the Fed is worried that the economy could be sliding into a recession," said Bruce C. Kasman, chief economist at J.P. Morgan Chase. He said the central bank is likely to cut rates at each of its next two meetings and "decided it was desirable and important to signal that to the market clearly."

At its two most recent meetings, the Fed's policymaking committee has indicated it considers inflation to be a major worry. Oil and other energy prices have been rising, and a weaker dollar could make imports more expensive. Rate cuts tend to result in a weaker dollar, a potential source of inflation.

But yesterday, Bernanke played down those worries, noting that higher unemployment tends to reduce inflationary pressure. "Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit," he said to Women in Housing and Finance and the Exchequer Club.

"It looks like the focus of the Federal Reserve has moved away from inflation and toward growth," said Drew Matus, a senior economist at Lehman Brothers.

After the speech, Bernanke was asked whether he expects, as the questioner put it, "the r-word."

"The Federal Reserve is not currently forecasting a recession," Bernanke said. "We are forecasting slow growth. But as I mentioned today, there are downside risks and therefore it's very important for us to stand ready . . . to take substantive action to address those risks and provide some insurance against those negative outcomes."

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