Spooked Fed Signals More Rate Cuts

It looks like Fed Chairman Ben Bernanke is a bit spooked.

Bernanke says more rate cuts coming

SAN FRANCISCO (MarketWatch) -- Federal Reserve Chairman Ben Bernanke said Thursday that more interest rate cuts are on the way, as the U.S. central bank wrestles with a deteriorating economy brought on by a struggling housing market, high energy prices and a weaker stock market.

In an unusually blunt speech, Bernanke said the economic outlook has taken a turn for the worse in the early days of the new year and that the Fed stands ready to act aggressively to ward off further weakening.

"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in a speech to a business group in Washington."

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," the Fed chairman said.

Several comments.

First, I would expect the Fed to do a 50 basis point cut at their next meeting.

Second, that combined with Europe's decision so far to stand pat with their interest rates means the dollar will depreciate even more and the Euro will appreciate.

Third, given that the role and mission of the Federal Reserve Bank is to maintain a stable currency, liquidity and a solid banking system, I find it a bit odd that Bernanke keeps talking about growing the economy. Bernanke's comments are more Keynesian than monetarist in nature.

I think it's been so long since we've had an appreciable recession, some folks are getting spooked as the macroeconomy inevitably slows down.