Bernanke vows to cut interest rates more if needed

~ The worry is that a two-year slump in housing has started to spread to other sectors of the economy.

WASHINGTON -- Fed chairman Ben Bernanke borrowed a page from Alan Greenspan's crisis playbook when he promised emphatically to cut interest rates further if the weak economy needs the help.

The response from Wall Street on Thursday showed that the former Princeton economics professor is improving but still has a few things to learn before he can match Greenspan's magic in wowing financial markets.

Still, the effort rated at least a "B+" while previous Bernanke attempts to handle the first major crisis in his two-year tenure at the Fed have gotten far lower grades.

The Dow Jones industrial average reacted to the last Fed rate cut Dec. 11 by plunging 294.26 points -- not exactly the response Bernanke was seeking as a way to instill confidence that he is up to the task of combatting the nation's worst credit crunch since the savings and loan crisis of the 1980s and early 1990s.

The problem has been that Bernanke and his Fed colleagues have appeared to be providing rate relief in a grudging fashion, disappointing investors who wanted a full-throated pledge that the central bank was prepared to do whatever was needed to keep the country from falling into a recession.

Welcome relief

On Thursday in a Washington speech, Bernanke was more forceful. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."

That's more like it, investors said, pushing the Dow average up by 117.78 points. It was welcome relief for a market that has been plunging in the New Year as investors have had to digest once bad piece of news after another indicating that the country was moving dangerously close to a recession.

The most ominous signal on that score came last week when the government reported that unemployment in December shot up to 5 percent, from 4.7 percent in November. That was the biggest one-month gain in the jobless rate since October 2001 during a time of massive layoffs in the travel industry following the Sept. 11 terrorist attacks.

The worry is that a two-year slump in housing, which shows no signs of easing, has now started to spread to other sectors of the economy, especially the financial services industry, with various industry leaders declaring multibillion-dollar losses because of bad bets on securities backed by subprime mortgages where defaults are soaring.

Election year concerns

The Bush administration, worried about what a recession in an election year would do to Republican chances to hold on to the White House, has announced that President Bush is considering a stimulus package that likely would include targeted tax breaks for individuals and businesses.

The problem is that it will take time for such a stimulus effort to get through Congress and by that time the country could well be in a recession. That is why the response from the Fed is viewed as critical. Timely interest rate cuts will boost economic activity and instill confidence that the central bank is on the job, doing what it can to prevent a downturn.

In the Thursday speech, there were hints of a more forceful approach by Bernanke, whose comments were viewed by many analysts as a solid signal that the Fed is prepared to cut rates by a bolder half-point when Fed officials next meet Jan. 29 and 30 and to keep cutting rates as long as needed until the economy begins to gain traction.

"Bernanke's comments were unambiguous," said Mark Zandi, chief economist at Moody's Economy.com. "The Fed is going to do what it can do to avoid a recession."

Still, given that economic growth is believed to have slowed to a barely discernible pace in the closing months of last year, there is a worry over whether Bernanke's newfound forcefulness will be enough to keep the recession wolves at bay.

"Bernanke's speech on Thursday was appropriate, but it may have come too late," said David Jones, chief economist at DMJ Advisors.