Fed Signals More Rate Cuts as Officials Cite Market Stresses

April 4 (Bloomberg) -- Federal Reserve officials signaled the central bank will keep lowering interest rates because financial markets remain distressed even after the fastest reduction of borrowing costs in two decades.

Fed Chairman Ben S. Bernanke told lawmakers yesterday that the central bank is ``ready to respond to whatever situation evolves,'' and cited ``considerable stress'' in markets. New York Fed President Timothy Geithner said policy makers must ``continue to act forcefully.''

The remarks, along with Bernanke's acknowledgment for the first time two days ago that a recession is possible, indicate policy makers are concerned that a cut-off of credit to homeowners and companies will cause a protracted slump. Government figures today may show the U.S. lost jobs for a third straight month in March.

Bernanke ``painted a pretty dismal picture,'' said Peter Kretzmer, senior economist at Bank of America Corp. in New York, who used to work as an economist at the New York Fed and Fed Board in Washington. ``This credit crisis is different and the credit condition problems are fairly severe,'' he added, forecasting a half-point rate cut this month.

Traders now see a one-in-five chance of a half-point reduction in the benchmark rate, to 1.75 percent, at the April 29-30 Fed meeting. That's up from 12 percent odds two days ago, while today's Labor Department report will offer investors fresh clues on future Fed actions.

Rate Cuts

Officials have lowered the target rate for overnight loans between banks by 3 percentage points since September, with 2 percentage points since January, the deepest reduction since the Fed started using the federal funds rate as its main policy tool around 1990.

San Francisco Federal Reserve Bank President Janet Yellen said policy makers must be ready to act in a ``timely manner'' to support growth which may be weaker than the ``sluggish'' pace she anticipates.

``Economic prospects remain unusually uncertain, and the downside risks to growth are significant,'' Yellen said in a speech yesterday at Stanford University in Stanford, California.

Fed officials have also established four new resources to inject liquidity, helping banks and Wall Street brokers maintain funding. Last month, the central bank made an unprecedented loan against a portfolio of $29 billion Bear Stearns Cos. securities to aid the company's takeover by JPMorgan Chase & Co.

`Substantially Impaired'

Even so, ``liquidity conditions in markets are still substantially impaired,'' Geithner told the Senate Banking Committee yesterday. ``The seeds of this crisis took a long time to build up, and they will take some time to work through.''

Yellen told reporters ``we've not exhausted the arsenal of tools we have,'' without specifying what new steps the Fed may take.

The Fed reported yesterday that its emergency cash loans to securities firms climbed 16 percent to $38.1 billion over the past week, and direct lending to commercial banks through the traditional discount window rose $6.46 billion in the week ending yesterday, to a daily average of $7.01 billion.

``The trend toward ugliness in credit spreads hasn't reversed at all, even in recent days,'' said Chris Low, chief economist at FTN Financial New York. ``Given the sense of urgency that came through in Bernanke's testimony, I think he is leaning toward a half-point cut.''

Bernanke told the Joint Economic Committee April 2 that declining home prices are ``at the core'' of the credit crunch. Falling employment, rising energy costs, and depreciating housing wealth are also undercutting consumer spending.

Loan Delinquencies

The S&P/Case-Shiller home-price index, measuring changes in 20 U.S. metropolitan areas, dropped a record 10.7 percent from January 2007. Consumers also fell behind on car, credit-card and home-equity loans at the highest level in 15 years in the fourth quarter, according to a quarterly survey by the American Bankers Association.

``The economy is still pretty weak right here,'' said Stephen Stanley, chief U.S. economist for RBS Greenwich Capital Markets in Greenwich, Connecticut. ``We do look for them to continue to be, if anything, surprisingly aggressive in easing.''

For much of yesterday's testimony, Senate committee members probed Bernanke and Geithner on why the central bank had to put $29 billion of its own money at risk to assist JPMorgan's acquisition.

The New York Fed said yesterday it would provide a public quarterly report on the gains or losses in the portfolio of Bear collateral. The assets, which include residential and commercial mortgages and collateralized mortgage obligations, will be held in a Delaware corporation established by the New York Fed and managed by BlackRock Financial Management Inc.

``We think we got a pretty good deal,'' Bernanke told Senator Jon Tester, a Montana Democrat, yesterday. ``We believe we will recover most or all of it, probably all of it.''

Geithner argued that the loan staved off a collapse of the U.S. financial system.

``Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education, and the expenses of everyday life,'' he said.