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Federal Reserve concerned about recession in US

A serious bout of financial market instability has dramatically changed the debate at the US Federal Reserve from worries about inflation to concerns about the possibility of a recession.

The Fed was widely expected to cut its target yesterday for the federal funds rate, the interest that banks charge each other -- the first time in four years.

Fed Chairman Ben Bernanke, facing his first major test since taking over from Alan Greenspan early last year, has been sending signals that he is prepared "to act as needed" to cushion the impact on the economy from the market turmoil.

A change in the funds rate, now at 5.25 percent, is reflected immediately in banks' prime lending rate, the benchmark for millions of US consumer and business loans. The prime rate is currently at 8.25 percent.

Most economists are predicting that Bernanke and his colleagues will choose to reduce the federal funds rate only by a quarter point, although a few see the chance for a bolder half-point move. But analysts agreed that whatever the Fed was to do yesterday would not likely be the last word on the subject.

Many economists are predicting a string of three or more rate cuts as the central bank works to calm financial markets and keep the worst slump in housing in 16 years from pushing the country into a recession.

In Japan, worries about slower economic growth at home and in the US were likely to keep the Bank of Japan from changing interest rates at a two-day policy board meeting starting yesterday.

US credit woes have rattled global markets and prompted concerns that it would drag on US economic growth and weaken demand for Japanese cars, electronics and other exports. Domestically, there are persistent signs of deflation, with July's core consumer price index falling 0.1 percent, the sixth straight monthly drop.

Last week Tokyo said the economy contracted in the April-June quarter at an annual rate of 1.2 percent, reversing its initial estimate for a 0.5 percent growth.

Japan's finance minister yesterday played down the US' credit problems but urged caution from the Bank of Japan. The bank last raised interest rates in February.
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