February 15, 2008 in Business

Bernanke unencouraging

Martin Crutsinger Associated Press
 

WASHINGTON – While Federal Reserve Chairman Ben Bernanke won’t say the economy is in a recession, he is using a lot of other downbeat words to describe the fix the country is in.

Describing economic activity as “sluggish” and the housing market as “deteriorated,” Bernanke gave a sober assessment of prospects to the Senate Banking Committee on Thursday.

The comments increased worries on Wall Street, and private forecasters declared that more interest rate cuts on the part of the central bank are a virtual certainty as Bernanke and his colleagues combat the effects of a severe credit crisis and the worst slump in housing in more than two decades.

Both Bernanke and Treasury Secretary Henry Paulson told the committee the economy could still avert a full-blown recession, but Democrats said they believed the government should be doing much more to help millions of Americans cope with threatened mortgage foreclosures.

“The outlook for the economy has worsened in recent months and the downside risks to growth have increased,” 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.”

He noted that hiring has slowed with job creation falling by 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 and home prices were likely to be a drag on consumer confidence.

The Fed chief told senators the “virtual shutdown” of the market for subprime mortgages 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. “Further cuts in homebuilding and in related activities are likely,” he said.

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 impacts 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 ranging from the threat that the housing slide could become even more severe, the job market could deteriorate more than expected or that the credit squeeze will intensify. He said the Fed will monitor the economy and “act in a timely manner as needed to support growth and provide adequate insurance against downside risks.”

On Wall Street, Bernanke’s comments pushed stocks lower. The Dow Jones industrials closed down 175.26 points at 12,376.98.

Private economists viewed Bernanke’s sober assessment as a clear signal that the Fed, which cut interest rates by 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, said he looked for half-point cuts at the Fed’s next two regular meetings March 18 and April 30.

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