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US economic outlook has worsened: Bernanke

Fed chief signals that he is ready to lower key interest rate

(WASHINGTON) Federal Reserve chairman Ben Bernanke told Congress yesterday that the United States’ economic outlook has deteriorated and signalled that the central bank is ready to keep on lowering a key interest rate – as needed – to shore things up.

In prepared remarks to the Senate Banking Committee, Mr Bernanke said that the one-two punch of the housing and credit crises has greatly strained the economy. Hiring has slowed and people are likely to tighten their belts further as they are pinched by high energy prices and watch the value of their single biggest asset – their homes – weaken, he warned.

‘The outlook for the economy has worsened in recent months, and the downside risks to growth have increased,’ Mr Bernanke said. ‘To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so.’

Mr Bernanke also said that the ‘virtual shutdown’ of the market for sub-prime mortgages – given to people with blemished credit histories or low incomes – and a reluctance by skittish lenders to make ‘jumbo’ home loans exceeding US$417,000 have aggravated problems in the housing market.

Unsold homes have piled up and foreclosures have climbed to record highs.

‘Further cuts in homebuilding and in related activities are likely,’ Mr Bernanke cautioned.

Given all the dangers facing the economy, the Fed ‘will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks’, he said, indicating that additional rate cuts were likely.

Mr Bernanke said that his forecast is for the economy to continue to endure a ‘period of sluggish growth’. That would be ‘followed by a somewhat stronger pace of growth starting later this year’ as the effects of the Fed’s rate cuts and a newly enacted stimulus package begin to be felt. The US$168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by US President George W Bush.

Even though Mr Bernanke’s forecast envisions an improving economic picture later this year, the Fed chief said that it was nonetheless ‘important to recognise that downside risks to growth remain, including the possibilities that the housing market or the labour market may deteriorate to an extent beyond that currently anticipated’ or that credit will become even harder to secure.

That is why, for now, Mr Bernanke indicated that the Fed is still inclined to lower interest rates.

Yet, that could change, depending on how the economy and inflation unfold.

‘A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives’ of promoting healthy employment and economic growth while keeping inflation under control.

Inflation should moderate, Mr Bernanke said. Yet, last year’s steep run-up in oil prices is a reminder that the Fed cannot let down its inflation guard and must keep close tabs on the inflation expectations of investors, consumers and businesses. Those expectations can affect their behaviour, which can affect the economy.

‘Any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate’ the Fed’s job, he said.

The troubles in the housing and credit markets threaten to push the US economy into its first recession since 2001 – if it has not fallen into one already.

 

Source: AP (Business Times 15 Feb 08)

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