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The Honolulu Advertiser
Posted on: Friday, January 11, 2008

Bernanke clear that more rate cuts are in order

By Jeannine Aversa
Associated Press Economics Writer

Hawaii news photo - The Honolulu Advertiser

Ben Bernanke

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WASHINGTON — Ben Bernanke ditched the cryptic-speak book that central bankers are often so fond of and was deliberately clear about the Federal Reserve's likely next move on interest rates: They're going down.

Bernanke pledged yesterday to slash interest rates as needed to prevent housing and credit problems from plunging the country into a recession.

The Fed chief made it clear the central bank is prepared to act aggressively to rescue a weakening economy. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

Bernanke showed his hand in terms of interest rates amid mounting concerns that the economy may be in danger.

Many economists now believe the Fed will slice its key interest rate by a bold half of a percentage point when the Fed meets on Jan. 29 and 30. Some, however, think the Fed will go with a more modest quarter-point reduction, given concerns that high energy prices could spark inflation.

"You didn't need a decoder ring to understand what Bernanke was saying," said Richard Yamarone, economist at Argus Research, who is in the half-point reduction camp. "It was like damn the torpedoes, full-speed ahead. We're taking the bull by the horns," Yamarone said.

Wall Street was buoyed by Bernanke's words. The Dow Jones industrial average jumped 117.78 points to close at 12,853.09.

To bolster the economy, the Fed lowered its key rate three times last year. Its last cut, on Dec. 11, put the rate at 4.25 percent, a two-year low. Still, Bernanke has been criticized for not acting more aggressively against the economy's problems.

Worries about the country's economic health have gripped voters, galvanized presidential candidates and spurred the White House and Congress to explore ways to avoid a recession. The White House is considering a tax cut.

Hiring practically ground to a halt in December, pushing up the unemployment rate to 5 percent, a two-year high, the government said in a report last week that rattled Wall Street and Main Street.

Bernanke, in a speech to a housing and economic forum in Washington, cautioned against reading too much into one report. But he said that if employment conditions continue to deteriorate, that would raise risks to the economy.

The big worry is that consumers might cut back their spending, sending the economy into a tailspin.

Incoming information suggests that the outlook for economic activity for this year has worsened and that the "downside risks to growth have become more pronounced," Bernanke warned.

A housing slump, weaker home values, harder-to-get credit and high energy prices all "seem likely to weigh on consumer spending as we move into 2008," Bernanke said.

Many analysts predict upcoming reports will show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year as consumers — major shapers of overall economic activity — tighten their belts. Major retailers yesterday reported weak sales for December, adding to uncertainty about the economy's outlook.

In light of these impediments to the economy's growth, "additional policy easing may well be necessary," said Bernanke.

His predecessor, Alan Greenspan, who ran the Fed for 18 1/2 years, recently warned that the economy is "getting close to stall speed."

Some economists said the odds of a recession are up to 50 percent.