Fed boss voices economic worry

Central bank looks at options in case recovery falters

— Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that the economic outlook remains “unusually uncertain,” and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.

Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the economy. He repeated a pledge to keep them there for an “extended period.”

Bernanke downplayed the odds that the economy will slide back into a “ double-dip”recession. But he acknowledged the economy is fragile.

The Fed is “prepared to take further policy actions as needed” to keep the recovery on track, he said. Bernanke said Fed policymakers haven’t settled on “leading options” but they are being explored. Those options include lowering the rate the Fed pays banks to keep money parked at the Fed, strengthening the pledge to hold rates at record lows and reviving some crisis-era programs, Bernanke said.

“If the recovery seems to be faltering, we have to at least review our options,” Bernanke told lawmakers. However, he said later: “We are not prepared to take any specific steps in the near term” because the Fed is still evaluating the strength of the recovery.

Bernanke is trying to send Congress, Wall Street and Main Street a positive message that the recovery will last in the face of growing threats, analysts said. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary, they said.

Wall Street wasn’t convinced. Shortly before Bernanke spoke, the Dow Jones industrial average was up about 20 points. Within minutes, stocks began falling and the Dow was down more than145 points. The index closed Wednesday at 10,120.53, down 109.43 for the session.

The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.

Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near-doubledigit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the eco-nomic slowdown.

“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, DConn. And Sen. Richard Shelby of Alabama, the highest-ranking Republican on the panel, said the economic outlook has become a “bit more cloudy.”

With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going, analysts said.

Bernanke and his Fed colleagues have cut their forecasts for growth this year.

If the recovery were to flashserious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed or lower the rate banks pay for emergency Fed loans. The Fed also could create a program to spark more lending to businesses and consumers in a bid to encourage them to ratchet up spending and grow the economy.

Bernanke said the debt crisis in Europe, which has rattled Wall Street, played a role in the Fed’s “somewhat weaker outlook.” Although financial markets have improved considerably since the depth of the financial crisis in the fall of 2008, conditions have become “less supportive of economicgrowth in recent months,” he explained.

As a result, Bernanke said, progress in reducing the nation’s unemployment rate, now at 9.5 percent, is now expected to be “somewhat slower” than thought. Unemployment is expect to stay high, in the 9 percent range, through the end of this year, under the Fed’s forecast.

Arkansas’ unemployment rate was 7.5 percent in June, the latest data available.

High unemployment is a drag on household spending, Bernanke said, although he believed both consumers and businesses would spend enough to keep the recovery intact.

Bernanke also said it would take a “significant amount oftime” to restore the nearly 8.5 million jobs wiped out over 2008 and 2009.

And Bernanke said the housing market remains “weak” and noted that the overhang of vacant or foreclosed houses is weighing on home prices and home construction.

Given the weak recovery, inflation is not a problem, Bernanke said. However, Bernanke didn’t talk about deflation, a prolonged and destabilizing drop in prices for goods, the values of stocks and homes, and in wages. Although most economists think the prospectsof deflation are remote, some Fed officials have expressed concern about it.

To strengthen the economy, many economists predict the Fed will hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012. Doing so would help nip any deflationary forces.

And keeping that bank rate at super-low levels also would mean rates on certain credit cards, home-equity loans, some adjustable-rate mortgages and other consumer loans would stay at their lowest point in decades.

Ultra-low lending rates,however, haven’t done much lately to rev up the economy. Consumers and businesses are cautious and aren’t showing an appetite to spend as lavishly as they usually do in the early stages of economic recoveries.

Bernanke, meanwhile, welcomed Congress’ new revamp of financial regulations signed into law by President Barack Obama on Wednesday. The new law, he said, “will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.”

Business, Pages 21 on 07/22/2010

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