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WASHINGTON: Federal Reserve chairman Ben Bernanke told Congress on
Wednesday that weak US economic growth may prompt the central bank
to cut interest rates further to ward off a severe downturn.
Bernanke said “downside risks” to growth
were buffeting the US economy and stressed the Fed was ready to
implement fresh rate cuts if economic momentum is threatened,
despite heightened inflation worries.
“The FOMC (Federal Open Market Committee) will
be carefully evaluating incoming information bearing on the economic
outlook and will act in a timely manner as needed to support growth
and to provide adequate insurance against downside risks,”
America’s top central banker said.
The Fed chairman spoke as he delivered the
central bank’s semiannual economic report to Congress, and as
economists continue debating whether the economy will fall into a
recession or continue expanding.
Bernanke said a multiyear housing slump and a
financial market credit crunch were threatening growth and had
created a “distinctly less favorable” economic environment.
He said consumer spending appeared to have
slowed “significantly” and that other reports in recent weeks
“suggest sluggish economic activity in the near term.”
US gross domestic product (GDP) growth moderated
abruptly to a 0.6 percent annualized crawl in the last three months
of 2007, compared with a strong 4.9 percent pace in the prior
quarter.
The Fed has aggressively slashed interest rates
by 225 basis points since September in a bid to fire up economic
momentum, cutting its key short-term federal funds interest rate to
3.00 percent.
Many economists expect the Fed to reduce rates
again at a March 18 policy meeting.
“Rate cuts are still on the agenda,” Stephen
Gallagher, an economist at Societe Generale, said of Bernanke’s
testimony.
Brian Bethune, an economist at Global Insight,
agreed, saying: “Bernanke has left the door wide open for further
interest rate reductions.”
David Kotok, the chief investment officer at
Cumberland Advisors, said in a briefing note that he expects the fed
funds rate to be cut to 2.50 percent on March 18.
In a nod to inflation risks, Bernanke said price
spikes appeared to be jostling American consumers who are juggling
mortgage loans, credit card bills and higher gasoline and
supermarket bills.
“The further increases in the prices of energy
and other commodities in recent weeks, together with the latest data
on consumer prices, suggest slightly greater upside risks to the
projections of both overall and core inflation than we saw last
month,” he said.
A government report Tuesday revealed inflation
at the wholesale level had rocketed 7.4 percent in the 12 months to
January, marking the sharpest annual gain since October 1981.
Rising crude oil and food costs, in particular,
have stoked price increases and world oil prices continued to hover
close to record peaks around $100 a barrel Wednesday.
Bernanke warned that if the prices of goods and
food jump higher it could “complicate” the central bank’s
ability to continue cutting borrowing costs to help underpin growth.
If the Fed cuts interest rates in a high
inflation environment it may fuel further price hikes.
While signaling that inflation risks could
hamper the central bank’s rate-cutting campaign, Bernanke said it
was also possible that slower growth could temper price increases.
He said the weak dollar was boosting exports of
American goods, but had also spurred inflation as it makes foreign
imports more expensive.
The dollar struck a record low against the euro
Wednesday, as the European currency struck $1.5144.
Bernanke divulged his views as a government
survey showed new-home sales fell almost three percent in January to
a seasonally adjusted annual rate of 588,000 properties, marking a
13-year low.
-- AFP
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