Bernanke: Lower Interest Rates Are "Feasible"

Federal Reserve Chairman Ben Bernanke speaks during a luncheon of the Austin Chamber of Commerce...

Federal Reserve Chairman Ben Bernanke speaks during a luncheon of the Austin Chamber of Commerce Monday, Dec. 1, 2008, in Austin, Texas. He said that further interest-rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year.

(Harry Cabluck/AP Photo)
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Federal Reserve Chairman Ben Bernanke said Monday that further interest-rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year.

The Fed's key interest rate now stands at 1 percent, a level seen only once before in the last half-century. To help lift the country out of a recession that started in December of last year, many economists predict Bernanke and his colleagues will drop the rate again at their next meeting on Dec. 15-16.

Bernanke spoke just hours after the National Bureau of Economic Research announced that the U.S. economy has been in a recession since December 2007.

He didn't mention the NBER's finding in his speech to business leaders in Austin, Texas, nor in answering questions afterward. However, Bernanke warned that the economy likely will remain stuck in a slump.

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"Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," he said.

In his speech, Bernanke noted that the bracing impact of the Fed's aggressive rate reductions has been somewhat stymied by the worst credit and financial crises to hit the world economy since the 1930s. Despite lower borrowing costs ordered by the Fed, skittish banks have been reluctant to lend money to people and businesses, a vicious cycle that has seriously hobbled the U.S. economy.

"Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold.

Bernanke said there are other ways that the Fed might bolster economic activity.

The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said.