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Fri, Feb 29, 2008 - Page 10 News List

US Fed mulling fresh rate cuts to prop up economy

DOWNSIDE RISKS Ben Bernanke told Congress the Fed was ready to further reduce interest rates to prevent an economic slowdown despite heightened inflation worries

AFP , WASHINGTON

US Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that weak US economic growth may prompt the central bank to cut interest rates further to ward off a severe downturn.

Bernanke said "downside risks" to growth were buffeting the US economy and stressed the Fed was ready to implement fresh rate cuts if economic momentum is threatened, despite heightened inflation worries.

"The FOMC [Federal Open Market Committee] will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

The Fed chairman spoke as he delivered the bank's semiannual economic report to Congress, and as economists continue debating whether the economy will fall into a recession or continue expanding.

Bernanke said a multiyear housing slump and a financial market credit crunch were threatening growth and had created a "distinctly less favorable" economic environment.

He said consumer spending appeared to have slowed "significantly" and that other reports in recent weeks "suggest sluggish economic activity in the near term."

US GDP growth moderated abruptly to a 0.6 percent annualized crawl in the fourth quarter of last year, compared with a strong 4.9 percent pace in the prior quarter.

The Fed has aggressively slashed interest rates by 225 basis points since September in a bid to fire up economic momentum, cutting its key short-term federal funds interest rate to 3 percent.

Many economists expect the Fed to reduce rates again at a March 18 policy meeting.

"Rate cuts are still on the agenda," Stephen Gallagher, an economist at Societe Generale, said of Bernanke's testimony.

Bernanke warned that if the prices of goods and food jump higher, it could "complicate" the Fed's ability to continue cutting loan costs to help underpin growth.

If the Fed cuts interest rates in a high inflation environment, it may fuel further price hikes.

While signaling that inflation risks could hamper the Fed's rate-cutting campaign, Bernanke said it was also possible that slower growth could temper price rises.

He said the weak US dollar was boosting exports of US goods, but had also spurred inflation as it makes imports more expensive.

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