WASHINGTON -- Federal Reserve Chairman Ben Bernanke said Thursday that the USA will avoid a recession, but that the outlook has deteriorated. He suggested more interest rate cuts are likely.
Bernanke's morning testimony before the Senate Banking Committee set the tone for a down day on Wall Street, its first this week. Dow Jones industrials closed at 12,377, down 1.4%
"Growth looks to be weak but still positive," Bernanke said, while noting, "The outlook for the economy has worsened in recent months."
In his first public comments since the Fed slashed interest rates in January, the chairman said a softer job market, high energy prices, stock market turmoil and declining home values likely were weighing on consumers. Their spending accounts for more than two-thirds of all U.S. economic activity.
"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 (Fed) and fiscal stimulus begin to be felt," Bernanke told committee members. But, he said, "Downside risks to growth remain."
Bernanke said the Fed would be "carefully evaluating incoming information" and would act in a "timely manner" to support the economy. He said he expected inflation to moderate, suggesting concerns about price pressures were not strong enough to stand in the way of further rate cuts.
The Fed last month cut its target for short-term interest rates, which influence borrowing costs economywide, from 4.25% to 3%, the lowest in 2½ years. The reduction, which came in two moves in nine days, was the steepest in decades and came amid growing concern that the economy could be slipping into recession.
In judging the effects of Fed rate cuts on the economy, Bernanke said the central bank is looking for stabilization in housing, the job market and credit markets. A significant worsening in the availability and affordability of credit "would certainly be a warning bell" that more rate cuts were needed, he said.
U.S. central bankers are widely expected to cut rates again at their next meeting, March 18, if not before, according to a market in which participants bet on future Fed moves.
By focusing on the downside risks to the economy, Bernanke's testimony "cements in place a further (half a percentage point) cut at the March … meeting, with the potential of a 2% funds rate by the June meeting," Bear Stearns economists said in a note to clients.
On the plus side, Bernanke said export growth and the fiscal stimulus package signed into law by President Bush on Wednesday should help. The Fed chairman said the impact of the stimulus should be felt in the July-September quarter, if not before.