Fed hints at another cut in US interest rates

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The Independent Online

Ben Bernanke signall ed that the Federal Reserve may not yet be done cutting US interest rates, even as he said that he believed the country would skirt a recession this year.

The Fed chairman, appearing on Capitol Hill before the Senate banking committee, said with the economy deteriorating, and further declines expected in the US housing market, the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks".

Although those remarks appeared to give less of a sense of urgency than statements before previous rate cuts, when he had promised to consider "substantive additional easing", Mr Bernanke did also reference the signs of continuing stresses in the credit markets. These stresses have crimped the availability of capital to individuals, to businesses and to the banking system. Mr Bernanke said: "A significant worsening in financial conditions or in credit availability would certainly be a warning bell that we need to take further action."

His words helped affirm expectations in the financial markets, which have been betting on a further half-percentage point cut in rates at the next meeting of the Fed's open market committee next month.

The Fed has slashed US interest rates from 5.25 per cent to 3 per cent since last September, in a string of moves that included a 75 basis-point emergency cut when global stock markets threatened to crash last month.

With economists debating whether the US is headed for, or already in, a recession, Mr Bernanke said he believed growth would be "weak but positive" in the first half of the year and then strengthen as the effects of previous rate cuts and a fiscal stimulus package agreed by Congress kicked in. "My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year," he said. "Although the baseline outlook envisions an improving picture, it is important to recognise that downside risks to growth remain."

His somewhat downbeat assessment of the housing market, where tighter mortgage conditions and the collapse of the "sub-prime" market for low-income borrowers have led to a downturn in activity, disappointed the stock market, and the Dow Jones accelerated lower during his testimony. It closed 175.3, or 1.4 per cent, lower at 12,377.

Mr Bernanke also told lawmakers that the Fed would next week revise down its forecasts for economic growth this year, bringing them into line with private sector economists.

His comments took the shine off some positive economic data released yesterday morning. The weekly jobs report showed a drop in unemployment claims last week that was bigger than Wall Street had forecast. The government also reported the US trade deficit declined to $711.6bn (£361bn) in 2007, after having set records for five straight years. That reversal was driven by a surge in exports, as the lower dollar meant American-made goods were cheaper.