Federal Reserve signals tougher response to risk

Federal Reserve officials, including chairman Ben Bernanke, are signaling a more aggressive response to the increasing risk of recession.

Bernanke testifies to Congress on Thursday, two days after a government report that economists predict will show retail sales stalled last month after a gain of 1.2 percent in November.

The Fed chief and Governor Frederic Mishkin unveiled the new strategy last week, when they said in speeches that they favor greater "insurance" against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

"The crucial change in Bernanke's language last week was the reference to the need for insurance," Lou Crandall, chief economist at Wrightson ICAP LLC in New Jersey, said in a note to clients. Until now, officials "have tended to describe the Fed's rate cuts as being scaled to the size of the projected problem," he said.

Donald Kohn, the Fed's vice chairman, said in a Jan. 5 speech that the officials decided to communicate more often with the public after the financial-market "turmoil" that began in August.

"We have tried to provide more information than usual to reduce uncertainty and clarify our intentions," Kohn said in a speech in New Orleans. The Wall Street Journal reported that Bernanke plans to speak more often and more forcefully.

The remarks by Bernanke and Mishkin led traders to increase bets the central bank will cut its main interest rate by half a percentage point this month.

Also See: For the European Central Bank, the glass for growth is half full