By Jennifer Yousfi
Managing Editor
Addressing the economy for the first time since the Federal Open Market Committee's Dec. 11 meeting, Federal Reserve Chairman Ben S. Bernanke said the Fed was ready to take "substantive additional action" in the face of a weakening economy.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said yesterday (Thursday), speaking before a group from the Exchequer Club and Women in Housing and Finance in Washington.
One analyst welcomed Bernanke laying out a course of action.
"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," Angel Mata, managing director of listed equity trading at Baltimore-based Stifel Nicolaus Capital Markets told Reuters.
Bernanke was careful to clarify that the Fed was not predicting a recession.
"A number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending [in 2008]," he said.
Analysts and investors welcomed Bernanke's remarks. Most saw it as a sign that the Fed will make a 50-basis-point cut at the next Federal Open Market Committee meeting slated for Jan. 29 and 30. Interest rate futures priced in a 90% probability of a half-point rate cut.
"From the tone of the speech, a 50-basis-point cut seems likely," Lawrence Lindsey, a former economic adviser to President George W. Bush and ex-Fed governor, told Bloomberg, adding that it's "unlikely" the United States is currently in recession.
Bernanke "is quite right to take precautionary measures right now," Lindsey said.
The markets reacted well, as all three major indices ended up for the second straight day after posting losses for the first five trading days of 2008. The blue-chip Dow Jones Industrial Average Index rose 0.92% to close at 12,853.09. The tech-laden NASDAQ Composite Index gained 0.56% to close at 2,488.52. And the broader S&P 500 Index rose 0.79% to close at 1,420.33.
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