Sat, Feb 16, 2008 page10

• Bernanke sees slow growth, rebound

  SENATE BRIEFING The US Federal Reserve chairman seemed to indicate that he was open to further cuts in rates if needed to stave off a downward economic spiral

  • AFP
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  US Federal Reserve Chairman Ben Bernanke on Thursday predicted "a period of sluggish growth" followed by improvement on interest rate cuts and a stimulus plan, while keeping the door open to further cuts.

  Speaking to a US Senate panel, Bernanke reiterated that the central bank is "carefully evaluating" the economic situation and remains ready to act "in a timely manner" to guard against a downturn -- a hint at more potential rate cuts.

  The remarks offered little new on the economic or monetary policy outlook but were the first by Bernanke since Congress approved and President George W. Bush signed a US$168 billion economic stimulus plan.

  Bernanke told the Senate Banking Committee that the stimulus plan, which aims to boost consumer and business spending, would help lift economic growth later this year.

  "At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," Bernanke said, according to a copy of his prepared remarks.

  The Fed chief, by repeating comments made in the Federal Open Market Committee (FOMC) statement last month, appeared to be indicating the central bank is open to further cuts in rates if needed to stave off a downward economic spiral.

  In response to a question, Bernanke said the Fed would release its new economic outlook later this month which "will show lower projections of growth, and they'll be reasonably consistent with what we're seeing with private forecasters."

  Brian Bethune, economist at Global Insight, said that "what comes out loud and clear is that the Fed has become increasingly concerned about mounting stresses in the financial system ... combined with increased downside risks to growth."

  The comments suggest the Fed "will reduce interest rates by a further 50 basis points on March 18, and another 50 basis points on April 30" to take the federal funds rate down to 2 percent.

  Robert Brusca at FAO Economics said the Fed is walking a fine line in stimulating the economy without sparking inflation.

  At the first sign of an upturn, Brusca said, "the Fed will have to stop being aggressive in cutting rates and will have to begin to ponder reversing course. For now the Fed has flexibility. But for how much longer will this last?"

  The Fed has made a series of dramatic cuts in interest rates since September to bring the federal funds rate to 3 percent from 5.25 percent amid unusual financial market turmoil. The actions included an emergency three-quarter-point cut on Jan. 22 and another half-point reduction a week later.

  Bernanke essentially repeated the comments from the Jan. 31 meeting and stated: "The FOMC will be carefully evaluating the incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

  On inflation, Bernanke repeated the view that price pressure "should moderate from its recent rates, and the public's longer-term inflation expectations should remain reasonably well-anchored."

  The latest figures showed a sharp slowdown in the US economy in the fourth quarter with a tepid expansion of just 0.6 percent on an annual basis, with the impact of the worst housing slump in decades hitting the banking sector and consumers.

  The Fed responded with a series of rate moves and Congress acted with unusual speed late last month and and early this month to pass a stimulus package after the White House called for a large growth package.
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