Fed's Bernanke: Central Bank Could Cut Rates To Zero

By Agence France-Presse The Federal Reserve should be prepared to cut rates to zero if the economy needs an extra jolt, a Fed governor said July 23. "We should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy," Federal Reserve Board Governor Ben Bernanke said in remarks prepared for a speech at the University of California in San Diego. Bernanke, who has a reputation as a watchdog on deflation, said the risk of weakening prices now outweighs the risk of inflation, and that as a result, the Fed is more likely to cut than raise interest rates. "Hence, monetary ease appears to be indicated for a considerable period," Bernanke said, adding that "keeping the funds rate target at or near its current level for an extended period may be sufficient." The Federal Open Market Committee (FOMC) trimmed the federal funds target last month by a quarter of a percentage point to a 1958 low of 1% to stave off deflation and boost growth. Bernanke said that because of substantial amounts of excess capacity in the economy, the Fed should be mindful of continued low inflation. "Even if the economy recovers smartly for the rest of this year and next, the ongoing slack in the economy may still lead to continuing disinflation," Bernanke said, adding "stable expectations of inflation and the recent weakening of the dollar may help to offset that tendency." Bernanke said he sees the core rate of inflation falling to 0.7%, from the current 1.2%, by the end of next year. Copyright Agence France-Presse, 2003