Thursday, July 17, 2008

Fed Chief Sees Gloomy Prospects For US Eeconomy

Source : The Business Times, Jul 16, 2008

(WASHINGTON) Federal Reserve chairman Ben Bernanke offered a gloomy assessment yesterday of any immediate prospect for improvement in American economic difficulties, including energy prices and instability in financial markets.

In prepared testimony at the Senate Banking Committee, Mr Bernanke warned that the US economy was facing the dual risks of a further slowdown and higher inflation.

Mr Bernanke avoided the word 'recession' in characterising the current economy, noting instead that consumer spending and exports were keeping growth 'at a sluggish pace' while the housing sector 'continues to weaken'.

'The economy has continued to expand, but at a subdued pace,' he said. But he added that spending for personal goods had 'advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes'.

He said that while the risks to the overall economy were still 'skewed to the downside', inflation 'seems likely to move temporarily higher in the near term'. The Fed, Mr Bernanke said, needed to guard against higher prices spreading throughout the economy.

This mixed assessment appeared to signal that the Fed would not be lowering interest rates further in spite of the economic sluggishness, as it did earlier this year, out of concern that lower rates would spur more inflation.

In June, the Fed declined to lower rates and instead suggested it might raise rates later in the year.

Mr Bernanke was especially pessimistic about any easing of energy prices, dismissing suggestions that they were being driven by speculation in futures markets. Instead, he said high energy costs reflected the markets' recognition that demand was outstripping supplies.

'Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil,' Mr Bernanke said. 'On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.'

The Fed chief's testimony yesterday came at an unusually turbulent time in financial markets, since it followed on the heels of the Fed's announcement that it would temporarily open its discount window to the two troubled mortgage giants, Fannie Mae and Freddie Mac.

The actions to stabilise Fannie and Freddie occurred over the weekend as US Treasury Secretary Henry Paulson also called for Congress to approve emergency legislation giving the federal government power to inject billions of federal funds through investments and loans.

The actions announced on Sunday echoed similar actions in mid-March, when the Fed moved to avert a financial collapse of the investment bank Bear Stearns by offering an emergency loan to facilitate its sale to JPMorgan Chase. At the same time, the Fed set up emergency lending facilities for major investment banks hit by the credit crunch.

Mr Paulson, testifying before the Senate Banking Committee yesterday, said the US administration had no immediate plans to extend emergency loans to mortgage giants Freddie and Freddie or to purchase the stock of the two companies.

The rescue proposed for the two mortgage finance giants is 'needed to respond to market concerns and increase confidence' in the government-sponsored firms, Mr Paulson said. He urged lawmakers to give speedy approval to a plan to allow the Treasury to buy equity in the two firms to boost their capital along with other measures to raise confidence.

'These steps to address liquidity pressures coupled with monetary easing seem to have been helpful in mitigating some market strains,' Mr Bernanke said.

But despite the 'positive effects' of the Fed's actions, he said that the problems of unstable markets continued because of 'declining house prices, a softening labour market and rising prices of oil, food and some other commodities'. -- NYT, AP, AFP

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