Bernanke Hints at Another Rate Cut

Includes: AGG, DIA, SPY
by: SA Eli Hoffmann

Fed Chairman Ben Bernanke said Thursday evening economic data to be released over coming week may determine whether or not the Fed cuts interest rates at its upcoming FOMC policy meeting on Dec. 11. Asking how the economic picture has changed since the committee's last meeting, Bernanke noted the labor market has remained solid, while home construction and sales have continued to be weak. Data received over the past month on consumer spending, "have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting," adding, "the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."

Echoing the view of Fed Vice Chairman Donald Kohn a day earlier, Bernanke noted the FOMC's outlook "has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October." Kohn's remarks Wednesday were a sharp departure from those of other Fed officials who had until now downplayed the chances of another rate cut. The change in tone rekindled investor hopes for interest rate cuts, sending equity markets to huge one-day gains (full story).

Current developments, Bernanke said, have "the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors." Economic forecasting, Bernanke said, has become more difficult in the face of current market stresses. "Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy," (full text).

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