With Outlook Dim, Bernanke Says Fed May Act on Rates

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said on Tuesday that the turmoil in the financial markets had increased the risk to overall growth and that federal regulators would have to be vigilant to halt the slide.


 “Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,” Mr. Bernanke told members of the National Association for Business Economics.

In an address that was at once sobering but hopeful, at least for the long term, Mr. Bernanke hinted strongly that the Fed’s Board of Governors would probably lower interest rates at its next meeting, on Oct. 28 and Oct. 29.

And he said that, however reluctantly, the Fed would continue to aggressively use all the tools it had to help ease the financial turmoil. “These are momentous steps,” he said, “but they are being taken to address a problem of historic dimensions.”

Only a few weeks ago, the Fed’s official posture was that inflation was a serious concern. But now, even though the outlook remains uncertain, inflation has eased somewhat. “In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,” Mr. Bernanke said.

In effect, he was preparing the markets, and perhaps the country and even the world, to expect a lowering of the benchmark interest rate that applies to bank-to-bank lending, now at 2 percent.

Moreover, Mr. Bernanke, while expressing faith in the just-enacted recovery program under which the government will buy troubled mortgage-backed securities and then resell them, seemed to counsel against counting on an overnight recovery.

“With time,” Mr. Bernanke said, “strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.”

The chairman emphasized that freeing the credit markets might be the most immediate need, not just for businesses that need the money to finance day-to-day operations but for ordinary households. “By potentially restricting future flows of credit,” he said, “the developments in financial markets post a significant threat to economic growth.”

President Bush also warned Tuesday against expecting a quick fix.

“It’s going to take time for these actions that I’ve described to you in the bill to have full effect,” he told a business gathering in Chantilly, Va. “You want to make sure that when we move, we move effectively. You want to make sure that the plan is well thought-out and well-delivered. Thawing the freeze in the financial system is not going to overnight, but it will be a process that unfolds over several stages.”

Mr. Bernanke spoke hours after the Fed announced a new program to buy up companies’ unsecured debt, a plan that pushes the agency closer than ever to the role of direct lender to business.

Mr. Bernanke said at the outset that the deep involvement of the Fed and other Washington agencies in trying to right the economy was not a development that he gladly embraced — but that dire circumstances required it.

“Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk,” he said.

Mr. Bernanke virtually predicted an economy that would be sluggish, at best, in the near term. “All told, economic activity is likely to be subdued during the remainder of this year and into next year,” he said.

His comments were not entirely pessimistic. He predicted, for instance, that the recovery program’s cost to taxpayers “will certainly be far less than $700 billion,” the amount called for to purchase the troubled mortgage-backed securities. By extension, he was predicting that the securities might be worth something to investors, and perhaps much more than their opaque nature would indicate right now.

Finally, Mr. Bernanke, who is an authority on the Great Depression, said that the country and its federal officials had learned from history that inaction or delayed reaction to financial calamity could be disastrous.

“This is not the situation we face today,” he said, predicting that official Washington’s fast response “together with the natural recuperative powers of the financial markets” will pave the way toward recovery.


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