Fed Reserve hints interest rate cut to boost liquidity

New York: In the US, a worried US Federal Reserve Chairman Ben Bernanke has hinted that the central bank may slash interest rates further to support the faltering US economy.

This is a departure from the Federal Reserve's earlier stand that lowering rates would have little effect in boosting economic activity while credit markets are frozen.

The Federal Reserve cut interbank lending rates to 2 per cent in seven steps between mid-September 2007 and the end of April this year, in order to stabilise the economy.

However, it doesn’t seem to have helped much. 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 Federal Reserve "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 Federal Reserve meets later this month.

Earlier Tuesday, in its latest move to keep credit flowing through the US economy, the US 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.

The US central bank said the 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 availability of loans to consumers and small businesses has dried up 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 Federal Reserve 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.

Bernanke says the economy is poised for subdued growth during the remainder of this year and into 2009.