Fed chief signals rate cut to help wobbly economy
WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke warned Congress that the nation is in for a period of sluggish business growth and sent a fresh signal today that interest rates will again be lowered to steady the teetering economy.
“The economic situation has become distinctly less favorable” since the summer, the Fed chief told the House Financial Services Committee.
Since Bernanke’s last such comprehensive assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said that the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment. This, he said, has further weakened the economy.
Incoming barometers continue to “suggest sluggish economic activity in the near term,” Bernanke told lawmakers. At the same time, he added, the Fed must keep a close eye on inflation given the recent run-up in energy and other prices paid by consumers and businesses.
For now though, the No. 1 battle is shoring up the economy.
Bernanke pledged anew to slice a key interest rate to help the wobbly economy, which many fear is on the verge of a recession — or possibly has already toppled into one.
The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said, hewing closely to assurances he offered earlier this month.
The central bank, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points — the biggest one-month reduction in a quarter century. Economists and Wall Street investors predict the Fed will cut rates again at its next meeting on March 18.
There are dangers that the economy will weaken even further.
“The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further,” Bernanke cautioned.
As Bernanke began his first day of back-to-back appearances on Capitol Hill to discuss the economy, there was more bad news on the housing and manufacturing fronts.
• Sales of new homes fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years, the Commerce Department reported. The median price of a new home dropped to the lowest level in more than three years.
• And, orders to U.S. factories for big-ticket manufactured goods dropped in January by the largest amount in five months.
On Wall Street, skittish investors sent the Dow Jones industrials down in morning trading.
The Fed chief was hopeful that previous rate reductions along with a $168 billion stimulus package of tax rebates for people and tax breaks for business will energize the economy in the second half of this year.
Even as the Fed tries to shore up the economy, it must remain mindful of inflation pressures, Bernanke said.
Record high oil prices — topping $100 a barrel — are pushing consumer prices upward. That’s shrinking paychecks, and with people feeling less well off because the values of their homes have dropped, consumer spending “slowed significantly” toward the end of the year, the Fed chief said.
Published in The Messenger 2.27.08