Fed chief hints at rate cuts, and notes better inflation outlook

Federal Reserve chairman Ben Bernanke signaled Tuesday that a cut in interest rates may turn into a reality as a result of the current economic landscape and a better inflation outlook.

“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,” Bernanke said at the National Association for Business Economics Annual Meeting in Washington.

“At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

The Federal Open Market Committee (FOMC) on Tuesday released the meeting notes of the Federal Reserve’s last formal meeting held on September 16, 2008. At that time, the Fed decided to leave the benchmark federal funds rate for overnight bank loans steady at 2%. The notes indicate rate cuts were put on the table even then, but were “not called for at this meeting."

Bernanke’s most recent statements would seem to suggest that the sour economy is currently much gloomier than the potential for higher inflation, resulting in an interest rate discussion that goes beyond the table.

Given the recent financial turmoil, many investors are expecting a cut by as much as a half a percentage point at the next FOMC policy meeting on October 28-29.

There are economists who say the inflation genie is back in the bottle, and rates should be lowered to provide banks the needed incentive to start lending again. Others, like Fed’s Bullard concerns cited just days ago, feel lowering rates is "not the right response."

The scale looks to be tipped, and it would appear a slice in rates is nearly guaranteed as highlighted further by Bernanke on Tuesday.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.”

A question now may turn to whether an interest cut will happen before the next official policy meeting. And then, of course, by how much.

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