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Fed Governor Says Rates May Be Cut Further to Spur Growth

By John M. Berry
The Washington Post

The Federal Reserve will keep cutting interest rates if need be to make sure the U.S. economy keeps growing next year, Fed Governor Laurence H. Meyer said Monday.

Meyer, in a speech to the National Association of Business Economists, said the Fed reduced overnight rates to 5.25 percent from 5.5 percent last week because turmoil in world financial markets is threatening U.S. economic growth.

The cut, although disappointingly small to many financial analysts, was designed to maintain growth by making it easier for banks to lower the cost of borrowing for many businesses and consumers.

Meyer said the rate reduction wasn't larger because evidence of a significant slowdown hadn't yet emerged, and because the U.S. economy continues to enjoy low unemployment and low inflation. However, he noted, that may change quickly.

"The cumulative force of recent developments appears likely to yield a slowing in the pace of growth next year," Meyer explained, indicating that the Fed stands ready to lower rates in response.

"This is a rapidly changing environment. Fortunately, monetary policy is capable of responding quickly to changing conditions. The role of monetary policy, in this episode, is to cushion this slowdown (and) provide insurance against downside risks. " he said.

The graveness with which some Fed officials regard those risks also was underscored Monday by William J. McDonough, president of the New York Federal Reserve Bank, who told a group of international bankers in a meeting here that the current crisis was the "most serious financial crisis since World War II."

"I think we should realize that we are living in an extraordinarily difficult time in our financial markets because [there is] a significant possibility of credit crunch," he said, adding, "but the people in this room have the capacity to make sure this doesn't happen" - that is, by continuing to extend credit rather than cutting it off indiscriminately, as some financial institutions have begun to do with some borrowers in the new riskier market environment.