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Bernanke sees room to reduce rates again By Edmund L. Andrews The New York Times Friday, February 15, 2008 Ben Bernanke, the chairman of the U.S. Federal Reserve Board, said Thursday that the economic outlook in the United States had worsened, leaving room for the central bank to reduce interest rates yet again. Testifying before the Senate Banking Committee, Bernanke said he still expected the economy to grow at a "sluggish" pace in the next few months and pick up speed later in the year. While continuing to avoid predictions of a recession, the Fed chairman told lawmakers that Fed officials had lowered their forecasts and would be "carefully evaluating incoming information on the economic outlook and will act in a timely manger as needed to support growth." "The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said, noting that the spiraling losses in home mortgages have dragged down the broader credit markets and shaken the broader economy. Most U.S. economic forecasters now estimate that the risks of a recession are at least 50-50, and a growing number of analysts contend that an economic contraction has already begun. Evidence of that weakness hitting European shores also mounted Thursday. Data showed growth slowed in the euro region in the final quarter of 2007 even in Germany, which had been thriving on strong exports. (Page 13) Bernanke said forecasts to be released by Fed policy makers on Wednesday would be lower than those in November and more in line with those of private-sector economists. The Fed has already reduced its benchmark overnight Federal funds rate five separate times since September, including twice in the span of eight days last month. As a result, the Federal funds rate has fallen to 3 percent from 5.25 percent since August. The Fed's rate cuts have led to a more modest decline in mortgage rates for borrowers with good credit, but they have done little to stop the meltdown in credit markets that stemmed from soaring defaults and home foreclosures tied to risky mortgages. What began as a panic about subprime mortgages last summer has spread to huge losses at major banks and heightened fear by investors toward many forms of business borrowing. Bernanke acknowledged that banks and other lenders had been pulling back, because of increased risk-aversion and because they had been forced to book huge losses from soured loans and to repurchase troubled mortgages and loans they had sold to investors. The unexpected losses and growing pressures, he said, prompted banks to become more restrictive in their lending and more "protective of their liquidity." Bernanke once again rejected predictions of a recession, saying that the economy would grow slowly but pick up speed later in response both to the Fed's lower interest rates and to the $168 billion economic stimulus package that President George W. Bush signed on Wednesday. "At present, my baseline outlook involves a period of sluggish growth, followed by somewhat stronger pace of growth starting later this year," he told lawmakers. But in cautioning that his outlook could turn out to be wrong, the Fed chairman left the door open to additional rate reductions. Henry Paulson Jr., Secretary of the Treasury, sounded more optimistic "I believe we are going to continue to grow, albeit at a slower rate," Paulson told the banking committee, insisting that the plunge in housing and credit markets was a "correction" rather than a "crisis." Bernanke acknowledged that a wide variety of economic indicators has declined in recent months, as the continuing meltdown in the housing and mortgage markets has rippled through the broader economy. The Fed chairman said that the job market in the United States has worsened, noting that payroll employment dropped 17,000 jobs in January, according to the Labor Department. That was down from an average increase of 95,000 jobs per month in the final three months of 2007. Unemployment, though still comparatively low at 4.9 percent, has edged up from 4.7 percent several months ago. Nationwide, housing prices have fallen and show no signs of having hit bottom, while the stock markets have fallen sharply from their highs last year. The economic situation is more than merely a "slowdown" or a "downturn," said Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee. "It is a crisis of confidence among consumers and investors." Bernanke noted that banks had been forced to book huge losses from mortgages on their balance sheets, reducing their ability to extend new credit, and that they had become "protective of their liquidity" and "less willing to provide funding to other market participants." Bernanke said inflation had been pushed up in part because of steep oil and food price rises, and that the dollar had weakened against major currencies. But the record-low dollar had lured foreign buyers to cheap U.S. goods, leading to a surge in export sales. http://www.iht.com/articles/2008/02/14/business/usecon.php
