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Fri, Jul 25, 2003 - Page 12 News List

US Federal Reserve may leave rates low

STABILITY The Fed governor said that key interest rates of zero percent were a possibility, and pledged to take any necessary action to revive the US economy


The Federal Reserve is willing to push a key interest rate to zero if necessary and leave rates low for a considerable period of time to ensure the economy escapes the grips of a destabilizing period of falling prices, Federal Reserve governor Ben Bernanke said Wednesday.

Bernanke, one of seven members of the Fed board, spelled out in more detail comments by Federal Reserve chairman Alan Greenspan during congressional testimony last week. Greenspan pledged that the Fed was prepared to keep rates low "for as long as it takes" to get the economy growing at a stronger pace.

Bernanke, in a speech at the University of California at San Diego, said that even when the economy begins growing at healthier rates, that may not be enough to ensure that the risk of deflation has been dealt with.

Deflation is a widespread decline in consumer prices. The problem now faced by the country is that the inflation rate, excluding energy and food, has dropped so low -- by some measurements to around 1 percent -- that any further declines could push the rate to zero or lower.

The US has not seen a prolonged period of falling prices since the Great Depression of the 1930s.

"Monetary ease appears to be indicated for a considerable period," Bernanke said.

Fed officials on June 25 cut the federal funds rate, the interest that banks charge on overnight loans, to 1 percent, the lowest level in 45 years.

Bernanke said keep the funds rate this low may be sufficient to bolster economic growth and eventually make sure that deflation is not a threat. But he said if this does not result in an economic rebound, he was ready to push rates even lower, all the way down to zero, if necessary.

Bernanke said if this did not deal with the problem, the Fed will be ready to move beyond the funds rate to employ unconventional means to influence interest rates.

He said the first stage of a "nontraditional campaign" could be a commitment by the Fed to keep rates at a very low level for an extended period of time.

He said going beyond that, the Fed should be ready to start buying longer term Treasury securities to push down financial market rates by increasing demand for these types of bonds.

Bernanke was more explicit than Greenspan in spelling out what the nontraditional means might be. Bernanke said that the Fed could also provide banks with additional reserves and provide direct loans to banks through increased lending at the Fed's discount window.

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