NEW YORK—Federal Reserve officials on Friday said falling home prices and financial market turmoil are big risks to the U.S. economy but pledged that the central bank would not shrink from taking bold steps to support growth.
At a symposium in New York, Fed Governor Frederic Mishkin said the central bank “has been acting and will continue to act decisively” to counter rapidly deteriorating financial market conditions.
“The disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains,” Mishkin said.
His tone echoed that of Fed Chairman Ben Bernanke, who signaled on Thursday that the Fed was ready to cut interest rates in the face of housing and credit crises that Wall Street fears could tip the United States into recession this year.
Financial markets now expect the central bank to cut benchmark borrowing rates by half a percentage point to 3.75 percent at the Fed’s January 29-30 policy meeting.
A bevy of weak U.S. housing, employment and manufacturing data in recent weeks has sparked fears of recession at many Wall Street firms.
Boston Fed President Eric Rosengren may have bolstered those fears on Friday. In a speech in Vermont, Rosengren traced a gloomy outlook for the economy when he said declining U.S. home prices could fall further this year.
“Since prices have declined substantially even in a relatively benign economic environment, one cannot discount the possibility that they could fall more rapidly should economic performance not remain strong in 2008,” he said.
In addition, he said the job environment may be weakening. He said a report showing the economy added just 18,000 jobs in December while the jobless rate surged to 5 percent suggested “less welcome developments.”
Rosengren, a voting member last year on the central bank’s rate-setting Federal Open Market Committee, had cast a dissenting vote in December in favor of a half point cut.
The Fed cut rates by a quarter point to 4.25 percent at the meeting.
But the Fed finds itself in a difficult situation on both sides of its mandate —sustaining growth and keeping inflation pressures in check — because fears of recession are increasing at the same time that energy prices are rising and employment growth is waning.
Mishkin said inflation expectations “appeared to have remained reasonably well anchored.” As a result, “easing the stance of policy in response to deteriorating financial conditions seems unlikely to have an adverse impact on the outlook for inflation.”
He said the U.S. central bank needed to be timely, decisive and flexible at times of economic distress, especially during periods of financial market disruption.
Former Chicago Fed President Michael Moskow also said on Friday that the central bank “clearly has to understand that the risks are on the growth side, not the inflation side.”
Moskow, who was making his first comments on the economy since retiring from the Fed in August, said he expects “at least another 50 basis points” of rate cuts after whatever action policymakers take in January.
In response to questions, Mishkin said it was vital to avoid “importing” inflation through devaluing a currency, which effectively raises the costs for consumers of imported goods.
The U.S. dollar has declined sharply in value in recent years, drawing protests from European trade partners while giving U.S. exports a boost.
(Additional reporting by Burton Frierson and Tamawa Kadoya in New York and Ros Krasny in Chicago; editing by Leslie Adler)
Copyright Reuters 2007. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks or trademarks of the Reuters group of companies around the world.
