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Wed, Oct 17, 2007 - Page 10 News List

Housing slump may slow growth: Fed

CONTRACTION Ben Bernanke said that a weak housing market and tighter credit could affect economic growth, but refused to commit to another round of rate cuts


A deepening housing slump will probably be a "significant drag" on US economic growth into next year and it will take time for Wall Street to fully recover from a painful credit crisis, US Federal Reserve Chairman Ben Bernanke said.

Bernanke once again pledged on Monday to "act as needed" to help financial markets -- which have suffered through several months of turbulence -- function smoothly and to keep the economy and inflation on an even keel.

"Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks," Bernanke said in a speech to the New York Economic Club.

A copy of his remarks was made available in Washington.

It was Bernanke's most extensive assessment of the US' economic situation since the August turmoil unhinged Wall Street.

The ultimate implications of the credit crunch on the broader economy, however, remain "uncertain," the Fed chief said.

Against that backdrop, Bernanke said the central bank would be closely watching the economy's vital signs in determining the Fed's next move. He did not specifically commit to cutting rates again, but rather kept his options open.

Economists have mixed opinions on whether the Fed will lower interest rates at their next meeting on Oct. 30 to Oct. 31. Some insist the odds are lessening that the Fed will need to slice rates; others, however, think rates will move lower.

"The Fed appears to be in watch mode at the present time," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

To help cushion the economy from the ill effects of the credit crunch and housing slump, the Fed on Sept. 18 slashed a key short-term interest rate by half a percentage point to 4.75 percent. It marked the first rate cut in more than four years. It also reflected the most aggressive action taken by the Fed to curb fallout from the credit crisis, which intensified in August.

Since that meeting last month, the housing slump -- the worst in 16 years -- has gotten deeper, Bernanke said.

"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," he said.

"However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions," he said.

Spending by businesses and individuals is an important ingredient to keeping the economic expansion -- which began in late 2001 -- from fizzling out.

Developments affecting the job market and income growth also will be watched closely.

"The labor market has shown some signs of cooling, but these are quite tentative so far, and real income is still growing at a solid pace," Bernanke said.

The benefits of a mostly sturdy employment climate have helped cushion some of the negative effects that the housing slump, weaker home values and a credit crunch have had on consumers.

Job creation rebounded last month, with employers boosting payrolls by 110,000, the most in four months. Wages grew solidly. The unemployment rate did creep up to 4.7 percent last month, but that rate is still considered low by historical standards.

Given all the problems faced by the economy, the economic performance so far this year "has been reasonably good," Bernanke said.

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