Fed signals further rate cuts

The U.S. Federal Reserve needs to re-examine its current interest rate stance in light of the deteriorating global financial situation, said chair Ben Bernanke on Tuesday.

In Fed-speak, those comments could mean the U.S. central banking system will follow Australia's 100-basis-point cut and chop its own interest rates in an effort to reflate sputtering economies in the United States and Europe.

"The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased," Bernanke said at the National Association for Business Economics Annual Meeting in Washington.

"At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

Fed smoke signals

Central bankers in Canada and the United States often hint at rate cuts or hikes through how they view the economy's growth prospects versus the threat of inflation. For instance, comments about rising prices might indicate possible borrowing cost increases.

Bernanke's speech this time around was all about flagging American economic prospects because of the continuing financial crisis in the United States and Europe.

"By potentially restricting future flows of credit to households and businesses, the developments in financial markets pose a significant threat to economic growth," Bernanke said.

The U.S. financial crisis likely will drag down the country's economic prospects well into 2009, words that sent the Dow Jones industrial index moving lower on Tuesday.

The index had lost approximately 250 points in trading following the noon hour.

Economic gloom everywhere

Already Britain is in a recession, according to the British Chambers of Commerce.

The United States is expected to post negative economic growth of 0.6 per cent in the last half of the year while Canada's economy could shrink by 0.4 per cent in the final three months of 2008.

In response to growing economic pessimism worldwide, central bankers in many countries have been pumping financial resources into the system through their willingness to accept lower quality collateral for loans to ailing companies and their ability to increase the flow of money through the auctions of cash on a short-term basis.

In another move Tuesday, the Australian central bank cut its interest rates by a full percentage point, a move that analysts believe other countries will follow.

For example, Scotiabank economists said both the Bank of Canada and the Federal Reserve should cut borrowing charges by one percentage point in the near future.

Both banks will meet to discuss interest rates towards the end of October.

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