Federal Reserve Chairman Ben Bernanke on Thursday said the US central bank was ready to act aggressively to counter a deep housing slump and credit market strains that were putting economic growth at risk. "In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke told a housing and finance group.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said. Analysts welcomed Bernanke's forthright acknowledgement of the dangers faced by the economy, which many fear could turn into recession.
"I think he's come to terms with the fact that while inflation may be a concern down the road, he has to take care of the train that's coming at him right now, which is the fear of a recession," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.
FOCUS ON GROWTH: Bernanke indicated that policy-makers now were more worried about sustaining growth than they were fearful of inflation. he said inflation expectations were "reasonably well anchored" and pledged to monitor those expectations closely.
He cited several factors including higher oil prices as well as lower stock prices and falling home values that he said were bound to hurt consumer spending this year. "Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," Bernanke said.
US stock markets surged after Bernanke's comments, while the dollar remained weaker against a basket of currencies as investors concluded that the Fed would aggressively lower benchmark interest rates at its next monetary policy meeting at the end of January. The Fed's policy-setting Federal Open Market Committee holds a two-day meeting January 29-30. Bernanke's comments reinforced market expectations that it will cut rates an aggressive half percentage point.
He said last Friday's US employment report, which showed only 18,000 jobs were created in December, was a clear sign of mounting economic risks. "Should the labour market deteriorate, the risks to consumer spending would rise," Bernanke said.
He said unsettled financial markets pose a lingering risk and said it was still unclear the extent of losses that banks and other market participants will face. But Bernanke said banks had gone into the current unsettled situation in good shape and should be able to weather it. "Notwithstanding the effects of multibillion-dollar write-downs on the earnings and share prices of some large institutions, the banking system remains sound," he said. "Nevertheless, the market strains have been serious and they continue to pose risks to the broader economy."
Bernanke traced much of the housing sector's problem to sloppy lending practices, especially in making so-called subprime loans to less creditworthy borrowers, and to a false belief that house prices would keep rising sharply forever.
He said rising foreclosures on subprime mortgages were making lenders wary about lending to anyone and thus spreading the impact of the housing downturn more broadly throughout the economy.
Bernanke said the Fed's action this year in introducing a term auction facility to inject liquidity into the banking system by selling credit was showing results. The intent of the auctions is to encourage banks to keep lending and Bernanke said the auctions may be made permanent.
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