Saguaro
11-08-2007, 06:04 PM
WASHINGTON (AFP) - Federal Reserve chairman Ben Bernanke, in a cautious outlook for the US economy, said Thursday he sees "sluggish" activity into early 2008 as mortgage and credit problems deepen.
Speaking to the Joint Economic Committee of Congress, Bernanke said the world's biggest economy could face more headwinds from the housing slump even as oil prices threaten to push inflation higher.
Bernanke said Fed policymakers decided last month to cut interest rates because they "expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate" of 3.9 percent.
"Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."
Bernanke's comments were in line with predictions from many private economists who see a darker economic picture for late 2007 and into 2008 despite a strong growth rate in the second and third quarters.
The Fed chief said the contraction in housing-related activity "seemed likely to intensify" because of tighter credit, and that consumer spending is likely to grow more slowly in view of higher energy prices, credit issues and continuing weakness in housing.
As for corporate spending, he stated that "heightened uncertainty about economic prospects could lead business spending to decelerate as well."
Additionally, Bernanke said the risks to the outlook were to the downside, with a potential for even further retrenchment in credit that could slow the economy. And he said the spike in energy costs could spark higher overall inflation.
Bernanke declined to offer odds for a recession in the US economy, saying the Fed is holding to a forecast for slow growth.
"Our forecast is for moderate but positive growth," he said in response to a question about the likelihood of recession.
"We haven't calculated the probability of recession. I wouldn't want to offer that today ... We think by the spring early next year that as the credit problems resolve and as we hope the housing market begins to find a bottom, the broader resiliency of the economy, which we are seeing, will take control and will help the economy recover to a more reasonable growth pace."
Bernanke said that since the October rate cut, the data suggests the US economy has been "resilient," but noted that volatility and strains remain.
He said between now and the end of 2008, about 450,000 subprime mortgages per quarter will have their first rate resets, increasing the chance of more delinquencies and foreclosures.
The central bank on October 31 cut its base federal funds rate a quarter-point to 4.50 percent, on the heels of a half-point cut in September, in an effort to ease stress in the housing and credit markets.
The odds of further interest rate cuts increased after Bernanke's comments.
December fed funds futures suggested a 93 percent chance that the Fed would cut its target for overnight rates by 25 basis points on December 11 from 87 percent on Wednesday.
Economist Stephen Gallagher at Societe Generale said the Fed is hoping to avoid another rate cut that might fuel inflation.
"Bernanke and several other officials speaking earlier this week are signaling a desire to keep rates on hold, at least at the December 11 (meeting)," he said.
Andrew Busch, analyst at BMO Capital Markets, said "the key question on the contagion factor (is) will it spread from housing to the broader economy such as business spending and consumer spending? Bernanke appears to saying it will."
But Andrea Kramer at Schaeffer's Investment Research said that with Fed members apparently divided on their next step, the downbeat comments sparked speculation "that Bernanke was slyly trying to keep his Fed cohorts' minds open for yet another rate cut come December."
http://news.yahoo.com/s/afp/20071108/bs_afp/useconomybankrate;_ylt=Aj82uIY0RYefL60zc0OnjZiyBhI F
Speaking to the Joint Economic Committee of Congress, Bernanke said the world's biggest economy could face more headwinds from the housing slump even as oil prices threaten to push inflation higher.
Bernanke said Fed policymakers decided last month to cut interest rates because they "expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate" of 3.9 percent.
"Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."
Bernanke's comments were in line with predictions from many private economists who see a darker economic picture for late 2007 and into 2008 despite a strong growth rate in the second and third quarters.
The Fed chief said the contraction in housing-related activity "seemed likely to intensify" because of tighter credit, and that consumer spending is likely to grow more slowly in view of higher energy prices, credit issues and continuing weakness in housing.
As for corporate spending, he stated that "heightened uncertainty about economic prospects could lead business spending to decelerate as well."
Additionally, Bernanke said the risks to the outlook were to the downside, with a potential for even further retrenchment in credit that could slow the economy. And he said the spike in energy costs could spark higher overall inflation.
Bernanke declined to offer odds for a recession in the US economy, saying the Fed is holding to a forecast for slow growth.
"Our forecast is for moderate but positive growth," he said in response to a question about the likelihood of recession.
"We haven't calculated the probability of recession. I wouldn't want to offer that today ... We think by the spring early next year that as the credit problems resolve and as we hope the housing market begins to find a bottom, the broader resiliency of the economy, which we are seeing, will take control and will help the economy recover to a more reasonable growth pace."
Bernanke said that since the October rate cut, the data suggests the US economy has been "resilient," but noted that volatility and strains remain.
He said between now and the end of 2008, about 450,000 subprime mortgages per quarter will have their first rate resets, increasing the chance of more delinquencies and foreclosures.
The central bank on October 31 cut its base federal funds rate a quarter-point to 4.50 percent, on the heels of a half-point cut in September, in an effort to ease stress in the housing and credit markets.
The odds of further interest rate cuts increased after Bernanke's comments.
December fed funds futures suggested a 93 percent chance that the Fed would cut its target for overnight rates by 25 basis points on December 11 from 87 percent on Wednesday.
Economist Stephen Gallagher at Societe Generale said the Fed is hoping to avoid another rate cut that might fuel inflation.
"Bernanke and several other officials speaking earlier this week are signaling a desire to keep rates on hold, at least at the December 11 (meeting)," he said.
Andrew Busch, analyst at BMO Capital Markets, said "the key question on the contagion factor (is) will it spread from housing to the broader economy such as business spending and consumer spending? Bernanke appears to saying it will."
But Andrea Kramer at Schaeffer's Investment Research said that with Fed members apparently divided on their next step, the downbeat comments sparked speculation "that Bernanke was slyly trying to keep his Fed cohorts' minds open for yet another rate cut come December."
http://news.yahoo.com/s/afp/20071108/bs_afp/useconomybankrate;_ylt=Aj82uIY0RYefL60zc0OnjZiyBhI F