Key rate may be cut to zero

AUSTIN, Texas -- Federal Reserve Chairman Ben Bernanke said on Monday that the nation's economic weakness will persist for some time, even if the government's efforts to boost lending help restore the credit markets to normal.

The economy "will probably remain weak for a time," even if the credit crisis eases, Bernanke said Monday in a speech in Austin. While the Fed can't push interest rates below zero, "the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective," he said.

Bernanke's comments pushed Treasury yields to record lows. Bernanke has created more than $2 trillion of emergency lending programs in the past year, using the Fed's balance sheet and money-creation authority to cushion the economy from the worst financial crisis in seven decades. The central bank may lower its benchmark interest rate to zero, economists said.

"Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited," Bernanke said in remarks to the Austin Chamber of Commerce.

One option is for the Fed to buy "longer-term Treasury or agency securities on the open market in substantial quantities," Bernanke said. "This approach might influence the yields on these securities, thus helping to spur aggregate demand."

Still, many economists expect the Fed to cut interest rates again when it meets Dec. 15-16.

"While (the Fed) could lower rates a little bit more, the fact is that if we have to do more, most of it is going to come in the form of something other than just straight interest rate cuts," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn.

"Bernanke is a policy activist, and you could see that today in the discussion of all the policy options that he thinks are still available," said Brian Sack, Washington-based senior economist at Macroeconomic Advisers LLC. He predicts the Fed will lower its main interest rate to zero next month.

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