Bernanke signals Fed rate cut
By Krishna Guha in Washington
Published: February 27 2008 15:21 | Last updated: February 28 2008 00:23
The dollar fell to a fresh record low against the euro on Wednesday as Ben Bernanke signalled that the Federal Reserve is likely to cut interest rates again next month.
The single European currency breached $1.51 after the Fed chairman made it clear that the US central bank remained firmly focused on the risks to growth, in spite of some increase in inflation risk following a run of bad price reports.
The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks”, Mr Bernanke told Congress.
The Fed has cut rates five times since last summer, taking rates down from 5.25 per cent at the beginning of August to the current level of 3 per cent.
However, Mr Bernanke said rate cuts to date had only had limited effect in easing overall financial conditions, in particular in the housing market.
“It has been very difficult to lower long-term mortgage rates through Fed action,” he said, adding “what we have done has been mostly just to offset the tightening of credit” that would otherwise have taken place.
Mr Bernanke said risk spreads had increased and in recent weeks there had been “some backing up in longer-term Treasury rates”, together muting the impact of Fed easing. He said the US was experiencing an increasingly broad-based slowdown.
Consumer spending “appears to have slowed significantly” while “the business sector has also displayed signs of being affected by the difficulties in the housing and credit markets”. Moreover, “nonresidential construction is likely to decelerate sharply in coming quarters”, he said.
Warning that “the risks to this outlook remain to the downside”, the Fed chairman highlighted a number of threats to growth. The housing market or labour market “may deteriorate more than is currently anticipated” and “credit conditions may tighten substantially further”.
In contrast, there were risks in both directions to inflation, although recent increases in commodity prices and the bad inflation numbers “suggest slightly greater upside risks” to prices than the Fed perceived last month.
While the prospect of more rate cuts put pressure on the dollar, gold and oil set new highs and stocks and Treasury bonds traded in a volatile manner.
Mr Bernanke’s appearance on Capitol Hill came as Sir John Gieve, deputy governor of the Bank of England, called on international regulators to consider new rules that would require banks to hold more capital in the boom years of a credit cycle but allow that to drop as the cycle turned down.
The Commerce Department, meanwhile, reported that sales of new homes fell to the slowest pace in nearly 13 years.
Additional reporting by Norma Cohen in London
http://www.ft.com/cms/s/0/85eeb76a-e546-11dc-9334-0000779fd2ac.html
