Fed not rushing to bail out investors with rate cut: report

  @ibtimes on August 30 2007 8:22 AM

The U.S. Federal Reserve is not rushing to cut benchmark interest rates because it wants to break investors of the view that the central bank is there to bail them out, an article in the Wall Street Journal said on Thursday.

Fed watcher Greg Ip, without quoting specific sources, said Fed Chairman Ben Bernanke was keen to draw a distinction between keeping financial markets ticking over and ensuring a sound economy.

The article said there was a perception, while Alan Greenspan was chairman of the Fed, that the Fed would react to problems of financial stability by cutting rates but that Bernanke was keen to break the automatic assumption that market convulsions lead to interest rate cuts.

The Fed cut the rate it charges banks for direct loans earlier this month amid financial market turbulence but has made no change to the benchmark Fed funds rate of 5.25 percent.

Officials acknowledge the perception of bailing out investors exists and if allowed to grow, could erode the credibility they need for keeping inflation low and encourage lax attitudes toward risk, the article said.

They hope that taking time to weigh the economy's need for rate cuts will help discourage investors from thinking Fed officials are overly concerned with falling asset prices.

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