Bernacke: Economy will 'slow noticably' in next quarter
WASHINGTON -- Federal Reserve Chairman Ben Bernanke said Thursday economic growth will slow noticeably in coming months while surging oil costs will raise inflation pressures. But he said the economy is nowhere close to the stagflation nightmare of the 1970s and he predicted an economic rebound by mid-2008.
Testifying before the Joint Economic Committee, Bernanke acknowledged a host of problems facing the economy, from a deeper-than-expected housing slump to a lingering credit crunch and now sharply rising oil prices and a falling value of the dollar, both of which increase inflation threats.
Bernanke stressed the central bank, which has cut a key interest rate twice over the past two months, was closely watching developments and would be prepared to respond as needed. However, he stressed the central bank believes economic risks are roughly balanced at present between the threat of weaker growth and higher inflation.
That was the stance the Fed took last week when it trimmed its federal funds rate, the interest banks charge each other, by a quarter-point to 4.5 percent following a bolder half-point cut in September.
Economists said Bernanke's noncommittal tone on further rate cuts could have been influenced by worries about a sharp plunge in the value of the dollar against other currencies, a fall that has accelerated since the Fed began cutting rates. Lower U.S. interest rates make foreigners less interested in holding dollar-denominated assets such as stocks and bonds.
Nonetheless, many analysts said they were still looking for the central bank to cut rates again in December or January, because they believe the economy will have slowed so much by that time the Fed will need to boost activity to prevent a recession.
"Bernanke may not have his finger on the easing trigger, but he likely won't hesitate to squeeze again if ... the economy weakens more than anticipated," said Sal Guatieri, senior economist at BMO Capital Markets.
Bernanke said he and his colleagues believe economic activity will "slow noticeably in the fourth quarter" compared with the 3.9 percent pace of the third quarter, reflecting the impact of higher energy prices, tighter credit and continuing weakness in housing will have on consumer spending. Many analysts believe growth could be as weak as 1.5 percent in the current quarter.
Many members of the JEC panel took issue with that assessment.
"I think we are at a moment of economic crisis," Sen. Charles Schumer, D-N.Y., told Bernanke. "I'm not surprised to hear experts, such as your predecessor Alan Greenspan, warn about the threat of a recession. I have begun to worry about it too."