Bernanke: Economic outlook has worsened

updated 1:12 p.m. ET Feb. 14, 2008

WASHINGTON - Federal Reserve Chairman Ben Bernanke told Congress Thursday the economy is deteriorating and signaled a readiness to keep on lowering a key interest rate to shore things up.

Bernanke also told the Senate Banking Committee that the one-two punch of housing and credit crises has greatly strained the economy. And he forecast sluggish growth in the near term. Bernanke also noted that hiring has slowed and that people are likely to tighten their belts further because of high energy prices and plummeting home values.

“The outlook for the economy has worsened in recent months, and the downside risks to growth have increased,” Bernanke said. “To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so.”

Bernanke also told senators that the “virtual shutdown” of the market for subprime mortgages given to people with blemished credit histories or low incomes — and a reluctance by skittish lenders to make “jumbo” home loans exceeding $417,000 — have aggravated problems in the housing market.

Unsold homes have piled up and foreclosures have climbed to record highs.

“Further cuts in homebuilding and in related activities are likely,” Bernanke cautioned.

Given all the dangers facing the economy, he said, the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” Bernanke indicated that additional rate cuts were likely. Still, he voiced hope that economic growth will improve later this year.

Bernanke’s Hill appearance with Treasury Secretary Henry Paulson and Christopher Cox, chairman of the Security and Exchange Commission, came amid escalating worry that the economy may be drifting into recession. The troubles in the housing and credit markets alone threaten to push the economy into its first recession since 2001 — if it hasn’t fallen into one already.

Bernanke and Paulson don’t believe the country will fall into a recession. Their forecasts still call for growth, albeit slow growth, they said. However, the pair did say Thursday that the administration and the Fed are expected to downgrade their economic forecasts for this year.

“It would be less, but I do believe we’ll keep growing,” Paulson said. Bernanke said a new Fed forecast due next week will “show lower projections of growth ....growth looks to be weak, but still positive.”

On Wall Street, Bernanke’s bearish assessment pulled stocks lower. The Dow Jones industrials was down more than 100 points in afternoon trading.

The Federal Reserve, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points — the biggest one-month rate reduction in a quarter-century. Economists and Wall Street investors believe the Fed will cut rates even more at its next meeting in March and probably again in April.

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