Fed Chief Leaves Room for Another Rate Cut
NYT
By Edmund L. Andrews
Published: February 14, 2008
WASHINGTON — Ben S. Bernanke, the chairman of the Federal Reserve Board, said on Thursday that the economic outlook had worsened, and he left room for the central bank to reduce interest rates yet again.
Testifying before the Senate Banking Committee, Mr. Bernanke said he was still expecting 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,” Mr. Bernanke said, noting that the spiraling losses in home mortgages have dragged down the broader credit markets and shaken the broader economy.
Mr. Bernanke’s testimony put a damper on Wall Street on Thursday, with the Dow Jones industrial average down about 140 points, or more than 1 percent, shortly before 2 p.m.
In his own testimony, Treasury Secretary Henry M. Paulson Jr. sounded more optimistic.
“I believe we are going to continue to grow, albeit at a slower rate,” Mr. Paulson told the banking committee, insisting that the plunge in housing and credit markets was a “correction” rather than a “crisis.”
On Wall Street, most 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.
Fed policymakers will release their newest forecasts next Wednesday, and Mr. Bernanke said the forecasts would be lower than those in November and more in line with those of private-sector economists.
The Federal Reserve has already reduced its benchmark overnight federal funds rate five times since September, including twice in the span of eight days last month. As a result, the rate has fallen to 3 percent from 5.25 percent.
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 since spread to huge losses at major banks and heightened fear by investors toward many forms of business borrowing.
Mr. Bernanke acknowledged that banks and other lenders have been pulling back, both because of increased risk-aversion and because they have 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 continued, have prompted banks to become more restrictive in their lending and more “protective of their liquidity.”
Mr. Bernanke again rejected predictions of a recession, saying that the economy would grow slowly but pick up speed later in response to both the Fed’s lower interest rates and to the $168 billion economic stimulus package that President 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.
Mr. 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 the job market had 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 declined and show no signs of having hit bottom, while the stock markets have fallen sharply from their highs late last year.
“The current economic situation is more than merely a “slowdown” or a “downturn,” said Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee. “It is a crisis of confidence among consumers and investors.”
Mr. Bernanke noted that banks have 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.”
Mr. Bernanke cautioned that inflation has been pushed up, in part because of steep increases in the prices of oil and food, and that the dollar has weakened against most major currencies. The Fed’s favorite measure of inflation, which excludes the volatile prices for food and energy, climbed 2.1 percent in 2007 — slightly faster than the Fed’s unofficial comfort zone for inflation.
Mr. Bernanke did not suggest that the Fed would raise interest rates in order to fight inflation, but he sounded less than confident that consumers and business still expect future inflation to remain low.
Saying that the Fed would be “closely monitoring” price trends, he cautiously said that inflation expectations “appear to have remained reasonably well-anchored.”
Christopher Cox, chairman of the Securities and Exchange Commission, told lawmakers at the same hearing that his agency was investigating a broad range of issues related to the securitization of mortgages on Wall Street.
Mr. Cox put particular emphasis on the need to revise rules governing credit ratings agencies, like Moody’s and Standard & Poor’s, which have been widely criticized for putting triple-A ratings on securities backed by subprime loans.
Source: NYT
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