Further rate cuts may be needed to spur economic growth, Federal Reserve Board chairman Ben S. Bernanke said yesterday.

“In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary,” Bernanke said in a speech yesterday before the Women in Housing and Finance and Exchequer Club Joint Luncheon, according to text released by the Fed. “The committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

He noted that changing conditions will determine monetary policy changes: “Financial and economic conditions can change quickly. Consequently, the committee 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.”

Explaining why the effect of the subprime mortgage market turmoil is so widespread, “given the small size of the U.S. subprime market relative to world financial markets,” Bernanke said, “following a period of more aggressive risk-taking, the subprime crisis led investors to reassess credit risks more broadly and, perhaps, to become less willing to take on risks of any type. Investors have also been concerned that, by further weakening the housing sector, the problems in the subprime mortgage market may lead overall economic growth to slow.”

Bernanke also hailed the Term Auction Facility auctions, which “may have overcome the two drawbacks of the discount window, in that there appears to have been little if any stigma associated with participation in the auction, and — because the Fed was able to set the amounts to be auctioned in advance — the open market desk faced minimal uncertainty about the effects of the operation on bank reserves. The TAF may thus become a useful permanent addition to the Fed’s toolbox.”

Downside risks to growth have become more pronounced recently, he said, and higher oil prices, lower equity prices, and softening home values seem likely to weigh on consumer spending this year.

The December employment report “was disappointing,” Bernanke said, and “should the labor market deteriorate, the risks to consumer spending would rise.”


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