Bernanke suggests rate cut as Fed aims to ease credit crunch (Roundup)

Oct 7, 2008, 20:04 GMT

Washington - Federal Reserve Chairman Ben Bernanke suggested another interest rate cut was on the way, while the US central bank Tuesday announced fresh moves to unblock credit markets and prevent the US economy from crashing to a halt.

Bernanke said the ongoing financial turmoil meant the outlook for economic growth had 'worsened' in recent weeks, as the availability of credit to banks, consumers and businesses has threatened to dry up completely.

That fact meant the Fed 'will need to consider whether the current stance of policy remains appropriate' - a possible nod to economists who have called for a further interest rate cut from the current 2- per-cent level. The Fed meets later this month.

Earlier Tuesday, in its latest move to keep credit flowing through the US economy, the central bank created a new fund to purchase commercial paper, a type of short-term security relied on by companies and financial institutions to fund day-to-day operations.

President George W Bush on Tuesday discussed additional international measures by telephone with European leaders, including British Prime Minister Gordon Brown, French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi, the White House said.

Finance ministers from the Group of Seven (G7) industrial nations will meet Friday in Washington.

In comments to small-business owners in Virginia, Bush offered assurances that the Fed's moves, as well as a 700-billion-dollar rescue package passed on Friday, would gradually help free up access to credit.

'No question the times are tough, but no question America will emerge,' Bush said, but warned people to be patient.

'It took awhile to get (credit markets) frozen, it's gonna take awhile to get it unstuck,' he said.

The availability of loans to consumers and small businesses has tightened as banks and financial institutions have been forced to deal with their own capital shortfalls. Bank failures, rescues and takeovers have sent global stock markets plunging.

The International Monetary Fund, in an annual financial report Tuesday, warned that financial institutions would suffer losses of 1.4 trillion dollars before the end of the crisis.

The US central bank said commercial paper markets had come under 'considerable strain' in the last few weeks as investors have pulled out of funding even those companies with no connection to the subprime mortgage crisis.

The Fed did not put a dollar-figure on the commercial paper it planned to buy. The Treasury was to make a deposit with the New York Federal Reserve Bank to finance the fund.

Bernanke said the Fed's latest moves were designed to help businesses that have struggled to raise the 'working capital' they need for daily operations.

The central bank has already issued hundreds of billions of dollars in loans to financial institutions in an effort to boost liquidity in the system and keep banks afloat.