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Bernanke Sends Signal Interest Rate Cuts Over

Posted by Benjamin Dona on Tuesday, June 3rd, 2008 at 6:25pm.

In a prepared talk Tuesday morning, Federal Reserve Chairman Bernanke signaled further interest rate cuts by the Federal Reserve are unlikely because of growing concerns about inflation and the weak dollar. Specifically, he said that the Federal Reserves powerful doses of rate reductions that started last September along with the $168 billion stimulus package, including rebates and tax breaks, "should help bring about somewhat better economic conditions in the second half of this year."

To help brace the economy, the Federal Reserve has dropped its key overnight lending rate to 2%, a nearly four-year low, but Bernanke hinted again today that last month's cut was probably the last. "For now, the policy seems well positioned to promote moderate growth and price stability over time," he said. However, even as he reiterated the hope for a pickup in growth in the second half of this year, Bernanke also said "the economy continues to battle against a trio of negative forces - a housing slump, credit problems and fragile financial markets." Many economists believe the Federal Reserve will hold rates steady at its next meeting on June 24-25 and probably maintain that position through the rest of the year.

Bernanke suggested that leaving rates at their current levels should be sufficient to accomplish the twin goals of stimulating economic growth while preventing inflation from running wild. The keys will be whether the dollar can start to regain some strength and if the bubble will finally burst in the oil markets. Unfortunately, neither of these two possibilities is guaranteed and any significant negative shifts in either market could send the Federal Reserve into an immediate interest rate tightening mode again.

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