(Recasts lead, updates with closing market quotes, paragraphs
By Glenn Somerville
WASHINGTON Jan 10 Federal Reserve Chairman Ben
Bernanke on Thursday acknowledged the economy faces increased
risks and indicated the U.S. central bank is ready to cut
interest rates aggressively to support growth.
Bernanke cited several factors, including higher oil
prices, lower stock prices and falling home values, that he
said were bound to hurt consumer spending this year.
"In light of recent changes in the outlook for and the
risks to growth, additional policy easing may be necessary,"
Bernanke told an event sponsored by two finance groups.
"We stand ready to take substantive additional action as
needed to support growth and to provide adequate insurance
against downside risks," he said.
Analysts welcomed Bernanke's forthright acknowledgment of
the dangers faced by the U.S. economy, which some fear may have
already slipped into recession.
"I think he's come to terms with the fact that while
inflation may be a concern down the road, he has to take care
of the train that's coming at him right now, which is the fear
of a recession," said Angel Mata, managing director of listed
equity trading at Stifel Nicolaus Capital Markets in Baltimore,
Bernanke cautioned that conditions can change quickly.
That meant the Fed "must remain exceptionally alert and
flexible, prepared to act in a decisive and timely manner and,
in particular, to counter any adverse dynamics that might
threaten economic or financial stability."
U.S. stock markets initially surged after Bernanke's
comments, then retreated before closing higher on a report that
Bank of America (BAC.N) was in talks to buy mortgage lender
Countrywide Financial Corp.CFC.N.
The Dow Jones Industrial Average .DJI added 117.78 points
to end at 12,853.09, while the Nasdaq Composite Index .IXIC
closed up 13.97 at 2,488.52.
Bond prices closed mostly lower as investors shifted money
to stocks, giving up earlier gains that were fueled by hopes
the Fed would lower benchmark overnight rates by a hefty
half-percentage point to 3.75 percent at its next scheduled
policy meeting on Jan. 29-3O.
Interest-rate futures contracts shifted to price in a near
certainty of a half-point cut. The Fed already has cut rates a
full percentage point since mid-September.
FOCUS ON GROWTH
Bernanke suggested policy-makers now were more worried
about sustaining growth than they were fearful of inflation. He
said inflation expectations were "reasonably well anchored" and
pledged to monitor those expectations closely.
"Incoming information has suggested that the baseline
outlook for real activity in 2008 has worsened and the downside
risks to growth have become more pronounced," he said. He cited
"considerable evidence that banks have become more restrictive
in their lending" to consumers and businesses.
But he told a questioner the economy would likely dodge
recession. "The Fed is not currently forecasting recession ...
we are forecasting slow growth," Bernanke said.
But Kansas City Fed President Thomas Hoenig sounded a
different note in a speech in Kansas City on Thursday, saying
he is "less pessimistic than some" and still wary of rising
Hoenig was one of five regional Fed presidents who sat on
the central bank's policy-making committee last year, but he
does not get to vote on interest rates in 2008.
JOB REPORT SHOCKS
Bernanke, meanwhile, said a report last Friday that showed
only 18,000 jobs were created in December was a clear sign of
mounting economic risks. "Should the labor market deteriorate,
the risks to consumer spending would rise," he said.
He said still-unsettled financial markets were a concern
and it was not yet clear the extent of losses that banks and
other market participants face as mortgage defaults mount.
But Bernanke said banks had gone into the current unsettled
situation in good shape and should be able to weather it.
"Notwithstanding the effects of multibillion-dollar
write-downs on the earnings and share prices of some large
institutions, the banking system remains sound," he said.
"Nevertheless, the market strains have been serious and they
continue to pose risks to the broader economy."
He said rising foreclosures on subprime mortgages were
making lenders wary about extending credit to anyone, not just
those with spotty credit histories, spreading the impact of the
housing downturn more broadly throughout the economy.
Bernanke said the Fed's recent introduction of a special
auction facility to inject liquidity into the banking system by
selling credit was showing results. The intent is to encourage
banks to keep lending and Bernanke said the auctions may be
(Additional reporting by Emily Kaiser, Joanne Morrison and
Patrick Rucker in Washington, and Alister Bull in Kansas City;
Editing by Leslie Adler)