Bernanke Says Growth Will Slow Significantly In Coming Months

WASHINGTON (AP) – Federal Reserve Chairman Ben Bernanke said Thursday that a host of economic problems, including the severe housing slump, will cause business growth to slow noticeably in coming months.

Bernanke told Congress’ Joint Economic Committee that the central bank is watching developments closely, but gave no signal that it’s prepared at the current time to cut interest rates even further.

He stressed that the central bank was keeping all options open, saying the Fed would be closely watching economic growth and the threat of inflation. If the economy slows to a crawl, the Fed cuts rates to boost activity while if inflation becomes a threat, it raises interest rates to dampen price pressures.

Going forward, Bernanke said the Fed would not be “dogmatic” in what it might do. “We will try to make judgments over time as we get more information,” Bernanke said, adding at another point that there were a “lot of uncertainties” at present.

A day after a huge selloff, stocks fluctuated on Thursday with the Dow Jones industrial average swinging between positive and negative territory. Fed policymakers last week cut a key interest rate for the second time in two months, but disappointed Wall Street by discouraging expectations that it would follow with further rate cuts.

Bernanke said he and his colleagues believe economic activity will “slow noticeably in the fourth quarter” compared to the 3.9 percent pace of the third quarter. “Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction begin to wane,” Bernanke told the JEC.

Many economists believe the economy’s maximum point of danger of falling into a recession will occur in the early part of next year. A variety of problems from the steepest housing downturn in more than two decades to a severe credit crunch, surging oil prices and a falling dollar have roiled Wall Street in recent days, triggering big plunges in stock prices.

The Dow Jones industrial average plunged by 360.92 points on Wednesday, the second drop of that magnitude in the past week. Much of that anxiety stems from a steady stream of bad company news as corporate giants such as General Motors, Merrill Lynch and Citigroup have reported huge losses.

Bernanke acknowledged the recent market turmoil, but he generally took a more upbeat view of things, saying the Fed believes the economy should rebound from the current problems by the second half of next year. He also repeated worries the Fed expressed last week: recent increases in oil and other commodities could raise the threat of inflation.

The Fed last week said the threats from weak growth and higher inflation seemed roughly in balance. Such a view, which Bernanke repeated on Thursday, will likely mean that the central bank plans no further interest rate cuts.

“All told, it was the judgment of (Fed policymakers) that, after its action on Oct. 31, the stance of monetary policy roughly balanced the upside risks to inflation and the downside risk to growth,” Bernanke said. However, members of the congressional panel said they believed a much more aggressive response was needed.

“I think we are at a moment of economic crisis,” Sen. Charles Schumer, D-N.Y., told Bernanke. “I am 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 to.”

The steep slump in housing has been worsened by rising numbers of mortgage foreclosures as borrowers are unable to meet higher payments as their initial low “teaser” rates reset.

Bernanke said that on average about 450,000 subprime mortgages will reset to higher rates each quarter through the end of next year. Bernanke said the number of foreclosures that will result from these resets can be reduced if financial institutions work with borrowers.

The Bush administration and federal banking regulators have stepped up pressure on loan servicers in recent weeks to be more aggressive in offering loan work-outs to borrowers in trouble.

Bernanke said the Fed plans to issue a proposal by the end of the year that would create new standards and rules for all lenders that issue subprime loans, mortgages offered to borrowers with weak credit histories.

By MARTIN CRUTSINGER AP Economics Writer

(Copyright 2007 by The Associated Press. All Rights Reserved.)

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Edited and Posted to KVIA.com by Miguel Martinez