Public trusts Fed, but it can only do so much

ANALYSIS

By Jeannie Aversa

updated 5:49 p.m. ET Feb. 14, 2008

WASHINGTON - When it comes to turning around the troubled economy, many people have confidence Ben Bernanke and his Federal Reserve colleagues can get the job done.

It must be a dose of somewhat heartening news for a Fed operating in crisis mode.

In his two years as Fed chairman, Bernanke is now confronted by his biggest challenge: housing and credit debacles that threaten to push the economy into its first recession since 2001, if they haven’t already.

How well Bernanke, a scholar of the Great Depression, handles these crises will shape his effectiveness, his credibility and his legacy at the central bank.

Fifty-five percent of the people surveyed in an Associated Press-Ipsos poll said they have a “great deal” or “some” confidence in the Fed to turn things around. Forty-one percent said that about Congress and only 28 percent said that about President Bush.

Yet the Fed only can do so much.

“Right now the Fed is looked at as the superhero to help the economy, but unfortunately there is a lot of kryptonite out there. The Fed’s powers are limited,” said Richard Yamarone, economist at Argus Research.

Appearing before the Senate Banking, Housing and Urban Affairs Committee, Bernanke said Thursday the economy is deteriorating and he signaled the Fed was prepared to continue lowering a key interest rate to brace the teetering economy.

The Fed “will act in a timely matter as needed to support growth and to provide adequate insurance against downside risks,” he said.

The Fed started cutting that interest rate in September. The rate reductions have turned much more aggressive recently. Over just eight day in January, the Fed lowered rates by 1.25 percentage points — the biggest one-month cut in a quarter-century.

Economists expect an additional reduction in March and perhaps in April.

The Fed’s hope is that lower borrowing costs will induce people to buy more, helping stabilize the wobbly economy.

But recent reports by Wal-Mart and other major retailers suggest that people are spending cautiously. Many are watching their biggest asset — their home — slump in value. High energy and food prices are factors, too; some people already are struggling with stacks of bills.

The Fed’s rate cuts also will not prevent more losses from financial companies that invested in complex mortgage securities that turned sour, at a loss of billions of dollars.

Interest rate relief will not produce a quick turnaround for the depressed housing market. Unsold homes have piled up. Home foreclosures are at record highs. Harder-to-get credit has made if more difficult, if not impossible, for some people even to buy homes.

“The most important thing we can do right now is to restore that consumer and investor confidence, which is absolutely critical if we’re going to get back on our feet again,” the Senate committee chairman, Christopher Dodd, told Bernanke.

The Connecticut Democrat commended the Fed chief “for taking an active role in addressing the weakness in our economy.”

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