WASHINGTON — Federal Reserve Chairman Ben Bernanke signaled Tuesday that policymakers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.
The world financial system is under “extraordinary stress,” and history shows that severe instability “can take a heavy toll on the broader economy if left unchecked,” Bernanke said in a speech. “The Federal Reserve will need to consider whether the current stance of policy remains appropriate.”
Bernanke’s remarks indicate that the central bank’s record loans to unblock credit markets are insufficient to prevent a deeper economic downturn.
Investors increased bets that the Fed will cut its main rate by as much as three-quarters of a percentage point this month after stock indexes slumped to four-year lows and premiums on loans between banks climbed to a record.
“It would be unwise to wait” after “such a clear message” from Bernanke, former San Francisco Fed President Robert Parry told Bloomberg Television.
A reduction by 1 percentage point would be the “appropriate amount,” though the Fed may not go that far, he said.
Stocks slid after Bernanke’s remarks failed to assuage investors’ concerns about deteriorating financial markets, with the Standard & Poor’s 500 falling 5.7 percent to its lowest close in five years.
Minutes of the Federal Open Market Committee’s Sept. 16 meeting, released Tuesday, showed that some officials then saw a need for a rate cut should there be a “significant worsening of the growth outlook.”
The committee, which next gathers Oct. 28-29, cut its target rate for overnight loans between banks by 3.25 percentage points from September 2007 to April, then left it unchanged at 2 percent for three meetings.
“With financial markets in such turmoil, the odds of an intermeeting cut are now above 50-50,” said former Fed governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.
Traders see about a 40 percent chance of a three-quarter-point cut in rates at or before this month’s meeting, futures prices showed in New York. The probability of at least a half-point cut remained at 100 percent.
Since Bernanke’s last public address, on Sept. 24 to Congress, the Standard & Poor’s 500 has lost 14 percent, the three-month London Interbank Offered Rate climbed 0.84 percentage points to 4.32 percent and government figures showed U.S. payrolls slid by the most in five years last month.
“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 a conference of the National Association for Business Economics. “At the same time, the outlook for inflation has improved somewhat, though it remains uncertain.”
