Fed 'Stands Ready' to Avoid Economic Recession Federal Reserve Chairman Ben Bernanke says the Fed is committed to keeping the U.S. economy out of a recession. He did not indicate a specific percentage-point cut to interest rates to prevent housing and credit problems from dragging down the economy.
NPR logo Fed 'Stands Ready' to Avoid Economic Recession

Fed 'Stands Ready' to Avoid Economic Recession

Federal Reserve Chairman Ben Bernanke on Thursday signaled the bank's willingness to lower interest rates to prevent housing and credit problems from causing a U.S. recession.

He did not indicate a specific percentage-point cut to interest rates.

Bernanke said that the Federal Reserve "stands ready" to gird the ailing economy.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

The Fed chairman made the comments on housing, financial markets and economic outlook to the Women in Housing and Finance and the Exchequer Club in Washington.

Some economists believe a rate cut – even as much as half percentage point – is in the offing.

Bernanke said the U.S. economy bode well through much of 2007. But then prices surged for energy and other commodities, keeping the Fed on inflation alert.

A sharp and protracted correction in the U.S. housing market, coupled with a weakening subprime mortgage market, put more strain on the economy.

"In all likelihood, the housing contraction would have been considerably milder had it not been for adverse developments in the subprime mortgage market," Bernanke said.

"Since early 2007, financial market participants have been focused on the high and rising delinquency rates of subprime mortgages, especially those with adjustable interest rates," he added.

About 21 percent of subprime adjustable rate mortgages are 90 days or more delinquent, and foreclosure rates are rising sharply, according to the Fed.

Some 2 million homeowners are due to have their adjustable rate mortgages, or ARMS, reset over the next year and risk losing their homes.

To help lift the economy the Fed delivered three rate cuts from September to December, slashing the federal funds rate — charged on overnight loans between banks — to 4.25 percent, a two-year low.

The rate cuts were designed to free up credit and reassure wary consumers, many of whom are carrying considerable credit-card debt.

In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point, as well, to 4.75 percent. This reduction was aimed at encouraging banks to borrow more freely from the Fed rather than severely tightening credit.

Bernanke's address comes a day after prominent investment firm Goldman Sachs released a report saying the economy will go into recession this year and could extend over two financial quarters.

He seemed to rebuff recent criticism that he hasn't made more rate cuts and should be more aggressive.

"The committee must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability," he said. He was referring to the Federal Open Market Committee, the monetary policymaking arm of the Federal Reserve System.

Hiring just about stalled in December as the unemployment rate rose to 5 percent, a two-year high.

Oil prices are stubbornly high despite dropping Thursday more than $2 a barrel to teeter in the $93 range. But the slide was overshadowed by reports that U.S. stockpiles of gasoline grew 5.3 million barrels, or 2.6 percent, to 213.1 million barrels during the week ended Jan. 4.

But Bernanke, who became Fed chairman two years ago after serving as a Fed governor and as President Bush's chief economic adviser, cautioned against reading too much into one report. He said the big worry is that consumers might cut back on their spending.

Consumer spending accounts for two-thirds of economic growth.

"A number of factors, including higher oil prices, lower equity prices and softening home values, seem likely to weigh on consumer spending as we move into 2008," he said.

With additional reporting from The Associated Press