Bernanke signals Fed ready to cut

Posted on 7 October 2008 by Ray Boulger

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In a speech to the National Association for Business Economics in Washington today Federal Reserve Chairman Ben Bernanke signalled the Fed was ready to cut interest rates in the light of worsening conditions in the credit markets, with the consequent negative impact on U.S. economic activity. He said “In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.”

The markets were already fully discounting a cut of at least 0.5% by the Fed at their next scheduled rate setting meeting on 29 October but these remarks suggest the cut may come sooner.

In an insightful comment Bernanke, an expert on the Great Depression period, said “We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased.” He added “This is not the situation we face today,” claiming that most financial companies had “sufficient capital and liquidity” and that the actions by Congress, Treasury, the Fed and other authorities, along with the “natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.”

Let’s hope Mervyn King, Gordon Brown and Alistair Darling note the comments in the last paragraph, agree with them and now start acting with those words in mind. The Government and the Bank of England have been behind the curve for most of the time during this current crisis. Now is the time for more action to support the many words we have had so far.

The likelihood of a Bank Rate cut this week has been increasing by the day since the latest market debacle initiated by the Fed allowing Lehman’s to go bust. The question now looks to be much more the size of the cut rather than whether we get a cut. With today’s comments from Bernanke and the Australian Central Bank cutting their rate by a whole point yesterday (twice as big a cut as expected by the market) a cut of more than 0.25% by the MPC on Thursday looks increasingly likely.

Category: Bank of England, Interest rates

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