Fed chief paints a grim picture
Ben S. Bernanke told senators that the U.S. economic outlook had "worsened."
WASHINGTON - Using words such as "sluggish" and "deteriorated," Federal Reserve Chairman Ben S. Bernanke gave a starkly pessimistic assessment of the nation's economy yesterday and signaled that the Fed will cut interest rates further if needed to combat the adverse effects of a prolonged housing slump and a severe credit crisis.
Both Bernanke and Treasury Secretary Henry M. Paulson Jr. said at a congressional hearing that the economy could still avoid a recession.
Bernanke told the Senate Banking Committee the serious housing slump and a credit crisis triggered by rising defaults in subprime mortgages had greatly strained the economy.
"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke told the committee.
Bernanke noted that hiring has slowed, with job creation falling 17,000 in January, the first such setback in more than four years. He said the weaker labor market along with recent declines in stock prices and declining home prices were likely to be a drag on consumer confidence.
The Fed chief told senators the "virtual shutdown" of the market for subprime-mortgage loans given to people with blemished credit histories or low incomes - and a reluctance by skittish lenders to make "jumbo" home loans exceeding $417,000 - have aggravated problems in the housing market.
Bernanke said that in his own economic forecast, he did not predict a recession, but a period of sluggish growth "followed by a somewhat stronger pace of growth starting later this year" as the effects of the Fed's rate cuts and the $168 billion economic-stimulus package of tax rebates begin to be felt.
However, he also said there were significant downside risks, including the threat that the housing slide could become even more severe and the possibilities that the job market could deteriorate more than expected and that the credit squeeze would intensify. He said the Fed would monitor the economy closely and would "act in a timely manner as needed to support growth and provide adequate insurance against downside risks."
Private economists said they viewed Bernanke's somber assessment as a clear signal that the Fed, which cut interest rates 1.25 percentage points in two moves in January, is prepared to cut rates further.
Brian Bethune, an economist at the private forecasting firm Global Insight Inc., said he looked for bold half-point cuts at the Fed's next two regular meetings on March 18 and April 30. He said that what came out "loud and clear" from Bernanke's testimony was an increased concern about the stresses to the financial system from the credit crisis.
While saying that housing represented the greatest threat to the economy, Paulson, who testified along with Bernanke and Christopher Cox, chairman of the Securities and Exchange Commission, said he did not believe the economy would fall into a recession. He said the administration was working now to ensure the government tax rebate checks were sent out without delay starting in May.