Posted on: Thursday, July 24, 2003

Fed says it's willing to take rate lower

By Martin Crutsinger
Associated Press

WASHINGTON — The Federal Reserve is willing to push a key interest rate to zero if necessary and leave rates low for a considerable period of time to ensure the economy escapes the grips of a destabilizing period of falling prices, Federal Reserve Governor Ben S. Bernanke said yesterday.

Bernanke, one of seven members of the Fed board, spelled out in more detail comments by Federal Reserve Chairman Alan Greenspan during congressional testimony last week. Greenspan pledged that the Fed was prepared to keep rates low "for as long as it takes" to get the economy growing at a stronger pace.

Bernanke, in a speech at the University of California at San Diego, said that even when the economy begins growing at healthier rates, that may not be enough to ensure that the risk of deflation has been dealt with.

Deflation is a widespread decline in consumer prices. The problem now faced by the country is that the inflation rate, excluding energy and food, has dropped so low — by some measurements to around 1 percent — that any further declines could push the rate to zero or lower.

The United States has not seen a prolonged period of falling prices since the Great Depression of the 1930s.

Fed officials on June 25 cut the federal funds rate, the interest that banks charge on overnight loans, to 1 percent, the lowest level in 45 years.

Bernanke said keeping the funds rate this low may be enough to bolster economic growth and eventually make sure that deflation is not a threat. But he said if this does not result in an economic rebound, he was ready to push rates even lower, all the way down to zero, if necessary.

"In my view, though recognizing that such an action poses costs on savers and some financial institutions, we should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy," said Bernanke, a former Princeton economist.

Bernanke said if this did not deal with the problem, the Fed will be ready to move beyond the funds rate to employ unconventional means to influence interest rates.

He said the first stage of a "nontraditional campaign" could be a commitment by the Fed to keep rates at a very low level for an extended period of time.

He said going beyond that, the Fed should be ready to start buying longer term Treasury securities to push down financial market rates by increasing demand for these types of bonds.

Bernanke was more explicit than Greenspan in spelling out what the nontraditional means might be. Bernanke said that the Fed could also provide banks with additional reserves and provide direct loans to banks through increased lending at the Fed's discount window.

"I am sure that the (Fed) will release more specific information if and when the need for such approaches appears to be closer on the horizon," Bernanke said.

In his congressional testimony, Greenspan indicated that he thought that it was unlikely that such nontraditional means would be necessary. The comment, until clarified, disappointed bond markets, which had been hoping that increased Fed demand for longer-term government securities would drive down their price.

Financial markets rallied on Bernanke's comments with stronger demand for bonds pushing the yield down on the 10-year Treasury note down to 4.10 percent.